Skip to main content

Government is recapitalising banks in India How to cash in

THE GOVERNMENT has announced the recapitalisation of public sector banks in the interim budget to infuse more capital into banks so that they can increase their lending and improve their liquidity. As per the Reserve Bank of India (RBI) norms, banks are expected to maintain a capital adequacy ratio (CAR) of 9% or higher. All Indian banks have higher CAR than the prescribed limit. However, it seems that the government intends all PSU banks to have a CAR of at least 12% (see table showing the list of PSU banks with CAR of 12% or less). This is what makes recapitalisation different in India from what is happening globally, especially in the US and Europe, where governments have to step in to save the possible bankruptcy due to erosion of capital. Indeed, the move will make PSU banks much stronger than earlier to face any eventuality.

However, what is good for banks may not be that good for their shareholders. This is because, when the government infuses more capital into banks, its percentage ownership increases at the cost of other shareholders. But, the story does not end here. It can very well be the case that post capital infusion, the profits grow to such an extent that despite of lesser percentage ownership, the shareholders are left with more money in their hands.

lets find out the impact of earlier recapitalisation on the performance of the banks. Logically, after the recapitalisation, banks should clean up their books and scale up the growth trajectory. We analysed the trend in profit growth during the financial years, after the increase in the paid-up equity capital. Apart from profit growth, we also tried to analyse the trend in interest income to find whether the bank could scale up lending with more capital in hand. In certain cases, banks did not do well after capital infusion. For example, for Bank of Maharashtra (BoM), the paid-up capital was up by Rs 100 crore in FY04. However, the interest earned grew by 7.7% and 4.5% in FY05 and FY06, respectively. The bank’s growth in interest-earned was not helped by the capital infusion. It shows that BoM could not lend more, as normally expected, with more capital. BoM’s profit declined post recapitalisation by 41.8% and 71.3% in FY05 and FY06, respectively. In the case of many other banks, though the interest income grew at higher rates post recapitalisation, the profit growth fell apart. UCO Bank’s interest income grew at a compounded annual growth rate (CAGR) of 22.4% during the period between FY05 and FY08 post the capital infusion in FY04. However, UCO Bank’s profits fell at a CAGR of 2.4% in FY05-08. This shows that high growth in lending may not necessarily translate into high bottom line growth. Similar was the case with IndusInd Bank and Andhra Bank.

Notwithstanding the dismal performance of a few banks post capital infusion, there were many big PSU banks, which did well after the recapitalisation. For instance, Bank of Baroda’s (BoB) paid up equity capital was increased by Rs 71 crore in FY06, and after that its interest earned grew by 27.7% and 31.2% in FY07 and FY08, respectively. Before FY06, the bank’s interest income was expanding at lower rates. BoB’s profit grew by 23.1% and 40.9% in FY07 and FY08, respectively. In this case, the recapitalisation was indeed helpful in revitalising the bank. Quite similar was the case with Allahabad Bank, Union Bank of India and Syndicate Bank among others.

In a nutshell, more banks have raised the growth trajectory after the recapitlisation. The key for shareholders is that the more stable the bank is, the more likely that it will actually grow at higher rates post infusion of capital. Hence, for investment purposes, recapitalisation will be more rewarding in the case of stable banks such as State Bank of India (SBI), Punjab National Bank (PNB), Bank of India (BoI), Union Bank of India, Bank of Baroda (BoB), Corporation Bank and Syndicate Bank.

Popular posts from this blog

All about "Derivatives"

What are derivatives? Derivatives are financial instruments, which as the name suggests, derive their value from another asset — called the underlying. What are the typical underlying assets? Any asset, whose price is dynamic, probably has a derivative contract today. The most popular ones being stocks, indices, precious metals, commodities, agro products, currencies, etc. Why were they invented? In an increasingly dynamic world, prices of virtually all assets keep changing, thereby exposing participants to price risks. Hence, derivatives were invented to negate these price fluctuations. For example, a wheat farmer expects to sell his crop at the current price of Rs 10/kg and make profits of Rs 2/kg. But, by the time his crop is ready, the price of wheat may have gone down to Rs 5/kg, making him sell his crop at a loss of Rs 3/kg. In order to avoid this, he may enter into a forward contract, agreeing to sell wheat at Rs 10/ kg, right at the outset. So, even if the price of wheat falls ...

ICICI Prudential Balanced Fund

 ICICI Prudential Balanced Fund scheme seeks to generate long-term capital appreciation and current income by investing in a portfolio that is investing in equities and related securities as well as fixed income and money market securities. The approximate allocation to equity would be in the range of 60-80 per cent with a minimum of 51 per cent, and the approximate debt allocation is 40-49 per cent, with a minimum of 20 per cent. An impressive show in the last couple of years has propelled this fund from a three-star to a four-star rating. The fund has traditionally featured a high equity allocation, hovering at well over 70 per cent, which is higher than the allocations of the peers. But in the last one year, the allocation has been moderated from 78-79 per cent levels to 66-67 per cent of the portfolio. ICICI Prudential Balanced Fund appears to practise some degree of tactical allocation based on market valuations. Within equities, well over two-thirds of the allocation is parked i...

Equity investors should track market developments

The stock markets have been volatile over the last few days. They are in a sideways movement and trying to find the bottom after a fall of 20 percent a week ago. The market sentiments are not very positive at the moment and the recent developments are expected to dampen them further. Globally, governments and central banks are trying to cut rates and announce packages to improve business sentiments. These are some of the major developments in the markets last few month: A) Global On the global front, another large US bank went into a financial crisis. The US government took quick measures to avoid the spread negative sentiments in the markets. The US government announced a bail-out package and agreed to shoulder the losses on the bank's risky assets. China announced a large cut in interest rates and reserve ratio to boost the investor sentiments in the markets. Recently, the World Bank announced China's growth rate next year will come down to 7.5 percent. The European ...

More on Mutual Funds

What Is a Mutual Fund ? A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. Anybody with an investable surplus of as little as a few thousand rupees can invest in Mutual Funds. These investors buy units of a particular Mutual Fund scheme that has a defined investment objective and strategy The money thus collected is then invested by the fund manager in different types of securities. These could range from shares to debentures to money market instruments, depending upon the scheme's stated objectives. The income earned through these investments and the capital appreciation realized by the scheme are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.   What Are The Types of Mutual Fund Scheme...

PF e-Passbook

  Provident Fund e-Passbook   The Employees Provident Fund Organisation now runs an e-passbook service that enables members to log in and access their provident fund accounts . This facility enables tracking of the money and ensuring that the employer's contribution has been deposited into the account. This facility is available to those whose accounts are with the central provident fund commissioner for maintenance and can be availed at members.epfoservices.in . Registration A member can register at the portal easily by using PAN , Aadhar or passport number as the log in and the mobile numbers as the PIN . This combination enables easy retrieval of information. Accounts After logging in, the member has to choose the state where the employer is located, and enter the code number of the employer, account number and name. These details can be obtained from any existing PF document . PIN To download the passbook, the member will request...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now