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Capital Infusion in Banks - An Analysis


  • Out of the current year’s budget, the Government of India has decided to infuse Rs.6990 crores in nine Public Sector Banks (PSBs) for which orders are being issued. 
  • This year, the Government of India has adopted a new criteria in which the banks which are more efficient would only be rewarded with extra capital for their equity so that they can further strengthen their position. 
The Method -
  • The methodology for arriving the amount to be infused in these banks has been based on efficiency parameters. First of all, weighted average of return on assets (ROA) for all PSBs for last three years put together was arrived at and all those who were above the average have been considered. 
  • The second parameter that has been used is return on equity (ROE) for these banks for the last financial year. Those who have performed better than average have been rewarded.  
  • Now let us understand What are ROA and ROE
  • Definition of "Return On Assets - ROA"
  • ROA tells you what earnings were generated from invested capital (assets). 
  • ROA for public companies can vary substantially and will be highly dependent on the industry. 
    i. This is why when using ROA as a comparative measure, it is best to compare it against a company's previous ROA numbers or the ROA of a similar company.
    ii. The assets of the company are comprised of both debt and equity. Both of these types of financing are used to fund the operations of the company. 
    iii. The ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income. The higher the ROA number, the better, because the company is earning more money on less investment. 
    For example- 

  • if one company has a net income of Rs 100 and total assets of Rs 500, its ROA is 20%; however, if another company earns the same amount but has total assets of Rs 1000, it has an ROA of 10%. 
  • Based on this example, the first company is better at converting its investment into profit. When you really think about it, management's most important job is to make wise choices in allocating its resources. Anybody can make a profit by throwing a ton of money at a problem, but very few managers excel at making large profits with little investment.
  • Definition of "Return On Equity - ROE"
    The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
    Return on equity may also be calculated by dividing net income by average shareholders' equity. Average shareholders' equity is calculated by adding the shareholders' equity at the beginning of a period to the shareholders' equity at period's end and dividing the result by two.
As per these above mentioned  two efficiency criteria, the amount allocated bank-wise is as follows :

S.No.
Name of the Bank
Amount (Rupees in crore)
1
State Bank of India
2970
2
Bank of Baroda
1260
3
Punjab National Bank
870
4
Canara Bank
570
5
Syndicate Bank
460
6
Allahabad Bank
320
7
Indian Bank
280
8
Dena Bank
140
9
Andhra Bank
120
Total
6990

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