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

Franklin India High Growth Companies Fund

Franklin India High Growth Companies Fund Online One of the key developments that the Street is keenly waiting for is a cut in interest rates by Reserve Bank of India . With demand rising gradually, a rate cut is expected to boost earnings growth for companies. In such a situation, schemes which invest in high growth companies are best suited, especially when seen from a long-term perspective. One such scheme is Franklin India High Growth Companies Fund. Fund managers Anand Radhakrishnan, Roshi Jain and Srikesh Nair strictly follow valuation parameters when it comes to choosing stocks.Valuation parameters, such as enterprise value, price-to-earnings growth ratio, forward price-to-sales ratio and discounted earnings per share, play a critical role in selecting companies for investments. Taking into account these parameters, the fund managers invest in companies which are poised for high growth in their respective sectors. This approach has been in favour of the scheme and it has perform...

Atal Pension Yojana contribution Tax Benefit for spouse

Contributions to Atal Pension Yojana (APY) are eligible for the same tax benefits as the NPS. This means that the contributions can be claimed under Section 80CCD (1B). The current limit for Section 80CCD (1B) is   Rs   50,000, over and above the   Rs   1.5 lakh limit under Section 80C. Section 80 CCD (1) is a different one, meant to cover employers' contribution towards NPS . You cannot get tax benefit by investing in the name of your spouse under Section 80 CCD . ------------------------------ ----------------- Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds Top 10 Tax Saver Mutual Funds to invest in India for 2016 Best 10 ELSS Mutual Funds in India for 2016 1. BNP Paribas Long Term Equity Fund 2. Axis Tax Saver Fund 3. Religare Tax Plan 4. DSP BlackRock Tax Saver Fund 5. Franklin India TaxShield 6. ICICI Prudential Long Term Equity Fund 7. IDFC Tax Advantage (ELSS) Fund 8. Birla Sun Life Tax Relief 96 9. ...

Avoid NFOs

  Don't get taken in by the flurry of new fund offers. You will be better off sticking to the tried and tested schemes.   For the past one year, to cash in on the bull run in equities, mutual fund houses have gone on a new fund offer (NFO) overdrive. But experts are unanimous in their advice: avoid NFOs . While past performance is not an indicator of how a fund will fare in the future, it does tell the investor how skilful the fund manager is. This crucial information is missing in an NFO. Not only is there no track record to judge an NFO by, many NFOs are similar to funds that already exist. If the new fund is similar to existing funds, you are better off investing in the latter. Around 67% of the new launches in 2014 were closed-end products. Investing in the NFO of a closed-end fund is doubly risky. In case the fund's performance is lacklustre, a closed-end fund does not allow you to exit. Even though closed-end funds are listed on the stock...

Mutual Fund Exit Load Changes

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 Mutual Fund Exit Load Changes AMCs don't communicate about any change in exit load directly with investors, but do update on their website   The exit load applicable to your investments is the load which existed at the time when you invested in the particular fund. Any subsequent changes in the exit load will not be applicable to your investments.   However, Asset Management Companies ( AMCs ) periodically publish addendums in the newspapers, which state any change in exit loads of specific schemes managed by them. Such changes are also posted on their websites. However, a direct communication to an investor is not made, considering the costs involved in doing so. In their own interests, investors should not only track the performance of the funds they i...

Debt Mutual Fund Dividends are Taxable

DDT is deducted when a non-equity fund declares dividends. Equity and balanced fund dividends are tax-free The AMC is correct to deduct the dividend distribution tax (DDT) as it is mandated by tax laws. DDT in mutual funds is deducted every time a non-equity fund declares dividends. Equity fund and balanced fund dividends are tax-free . It is possible that you have invested in a non-equity fund for the first time or have received the dividend under a non-equity fund for the first time. That is why this is the first occasion when you have come across DDT.   The rate at which non-equity schemes deduct DDT has also gone up after the July 2014 budget. This is due to a change in calculation methodology. Earlier, if the fund has to declare a dividend of R 100, it used to make a provision for R 128.3, paying R 28.3 to the taxman and distributing the balance to the investor. This allowed the investor to bear less tax since the effective tax rate was 22.07 per ce...
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