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

Mutual Fund Review: Religare Tax Plan

Tax Plan is one of the better performing schemes from Religare Asset Management. Existing investors can redeem their investment after three years. But given the scheme's performance, they can continue to stay invested   Given the mandated lock-in period of three years, tax saving schemes give the fund manager the leeway to invest in ideas that may take time to nurture. Religare Tax Plan's investment ideas revolve around 'High Growth', which the fund manager has aimed to achieve by digging out promising stories/businesses in the mid-cap segment. Within the space, consumer staples has been the centre of attention for the last couple of years and can be seen as one of the key reasons for the scheme's outperformance as compared to the broader market. It has, however, tweaked its focus and reduced exposure in midcaps as they were commanding a high premium. The strategy seems to have worked as it returned a 22% gain last year. Religare Tax Plan has outperformed BSE 100...

Mutual Fund Review: L&T MIP

        This fund won't deliver chart-topping returns. However, over the long run it will not disappoint and end up beating the category average The fund has seen numerous changes at the helm. When Katare took over in October 2007, he made dramatic alterations to the portfolio. On the equity side, he increased the number of stocks to 11 (November) from 2 (September). On the debt side, he added Certificates of Deposit (CDs), while earlier Treasury Bills (T-Bills) and cash accounted for 88 per cent (September 2007) of the portfolio. In November 2007 he exited T-Bills for good. The results impressed. In the last quarter of 2007, it delivered 12.83 per cent (category average: 6.12%). In 2008, the first quarter performance was nothing short of impressive, a return of 9.93 per cent (category average: -3.97%). While other players increased their portfolio maturity, Katare maintained a low maturity profile. While the average maturity of the category was 2.81 years that quarter, th...

Mutual Funds: Past Performance is not just everything

Many a times your agent / distributor / relationship manager tries to push you some mutual fund schemes by enticing you with a typical sales pitch…"Sir, this scheme has generated 20% returns in the past one year." And this sales pitch often gets louder when the market conditions have been favourable. Some of the agents / distributors / relationship managers have another unique way of luring you. They say, "Sir / madam this scheme has been awarded the best scheme award in the past by a leading business channel"... And hearing all these sales talks you investors very often get attracted and sign a cheque in favour of the respective scheme.   But please ask yourself do you hear these sales talks when the capital markets turn turbulent? Why is it so that your agent / distributor / relationship manager avoids talking to you during turbulent times of the capital markets and doesn't boast about returns generated by the respective funds or awards being conferred on t...

Reconfigure investments to reap benefits in DTC

    Investing for tax benefits under the new Direct Taxes Code ( DTC ) will be different in several ways from what taxpayers are familiar with right now. This will require some reconfiguration in the nature of investments for the investor and they need to be ready to tackle the changes that will come about once the new DTC is implemented from financial year 2012-13.One area of interest for most taxpayers is the manner in which they can extract the maximum tax benefit. Here is a look at the situation and also how it changes from the existing position. Basic deduction: At present, there is a deduction of Rs 1 lakh that is available for an individual when they make investments under specified areas such as provident fund, public provident fund, national savings certificates, equity linked savings scheme and insurance premium, among others. This benefit is available under Section 80C of the Income Tax Act. This has been replaced by a new Section 68 under the DTC where there is a deduct...

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 ...
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