What is Return on Assets & Return on Equity for UPSC / SSC / RBI / RRB / NABARD Video Lecture | Indian Economy for Government Exams (Hindi) - Bank Exams

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hello and welcome to steady IQ in this
lecture we will discuss about return on
assets and return on equity a return on
assets and a return on equity what does
the return on asset and what is return
on equity briefly if we say these two
are two main indicators of the
performance of banks so these are the
indicators of performance of banks why
you return on asset and why return on
equity has become an important current
affair is because recently we see in the
news that the performance of the public
sector banks the PSP's has come down
comparatively to the other commercial
banks so this is the reason why return
on assets and return on equity has
become important Current Affair topics
so in this lecture let us see water's
return on asset and also we will exploit
what does return on equity and how it
measures the performance of banks and
why it is important so as we said both
these are indicators of the performance
of banks first of all let the sea waters
return on assets so return on assets all
ROI return on asset indicate how
profitable is a bank compared to its
assets so relative to its assets how
profitable is the bank so profit is
calculated on the basis of the assets of
the bank so this is the relationship
between the assets and the profit of the
banks so return on asset it is a
measurement we already said that it is
an indicator so this is a measurement
and this measures the relationship
between profit and the assets of a bank
so return on asset measures how
efficiently a bank utilizes its assets
so in the efficiency at which the bank
utilizes its assets so if a bank
utilizes its assets in a better manner
the return on assets will be more so if
there is better utilization of the
assets ROA or the return on assets will
be more so if the return on assets is
less what does this mean if ROA or
return on assets of a bank is less it
means that the
uses less effectively its assets the
assets of the banks are underutilized or
utilized inefficiently so how do we
derive it ROA or return on assets so
return on asset equal to net income of a
bank divided by total average assets net
income divided by average total assets
so if ROA is small it means the bands'
are better utilizing its assets and if
ROA
is less it means there is less cell
efficiency with the banks with regard to
the utilization of the assets of the
banks so which one would be more ideal
ideally the ROI or the return on assets
should be high so if ROA or the return
on assets is high we already said it
means the bank is better utilizing its
assets there is better management with
the banks so ideally the return on
assets should be on the higher side or
it should be improved
so when return on assets of bank is high
it means that there is more profit with
the banks so you know that with more
efficiency and with better management
the profit of any firm will go up so in
case of banks also when the return on
its assets is high it means the profit
of the bank is high so higher profit
means better capital for the banks let
us see how higher profits will add on to
the capital of the banks further let us
take a balance sheet so let us take a
balance sheet balance sheet has two
sides one is the liability side the
second one the asset side so balance
sheet has both assets and liabilities so
when it comes to assets what are the
main assets of a bank or any form first
of all any firm will have fixed assets
Fixer assets in the form of furniture
land building etc a bank will also have
current assets so current asset means
cash in hand etcetera are considered to
be current assets and the main asset for
a bank is debtors so bank will have
debtors also there should be a closing
stop for any form so
there will be a closing stock also
coming to the liability side the main
liability of any firm particularly a
banker's capital so capitalism main
liability a firm will also have current
liability as in case of current assets
so there will be current liability as
well
there will be provisions also provisions
for example
taxation dividend etc so tax dividends
etc so coming to the capital we were
discussing about the capital so you must
remember that in the case of a balance
sheet there is a capital and the capital
is in the liability side so whatever
profit the firm earns and we are talking
here about the banks so what power
profit a bank earns this is added to the
capital so profit is added to capital so
we said that when a return on asset
increases or when there's more return on
asset for the banks the profit of the
bank increases so when profit of the
bank increases what will happen this
profit is added to the capital of the
bank so here we will see that the profit
is added to the capital of the bank so
with better return on assets that is
when return on asset increases the
capital of the bank increases it will
lead to an increase in the capital of
the bank and what is a result of
increase in capital of a bank when the
bank's capital increases the bank will
have more money for lending so banks
will have more money for lending which
means the business of the bank will
expand the profit will increase so the
productivity of the bank will increase
so this is the ultimate result so
ideally what should be there the return
on asset should be more which means the
bank should be able to utilize its
assets in a better way and roa orders or
the return on asset is one indicator of
a bank's performance or it measures how
a bank utilizes its assets hope this is
clear for you now coming to ro e that is
return on equity
what does equity equities share
holder's fund so equity means
shareholders whatever the shareholders
has given that is equity so what will
return on equity the return on equity
measures the band's ability to utilize
the shareholders funds so return on
equity is the measurement of utilization
of bands of their shareholders funds
return on assets is utilization of
assets here it is shareholders funds
like the return on asset return on
equity should also be more why because
the bank should be able to properly
utilize the funds of the shareholders
that is the equity so with Bechtel
utilization of the equity or the
shareholders funds the return on equity
will be more so ideally the return on
equity should be more and what is a
result of that when return on equity is
more this will also add on to the
capital of the bank let us see how
coming back to the balance sheet we have
already seen the capital in the
liability side and we said that profit
is added to the capital likewise one
more thing is added to the capital that
is reserves and surplus so reserves plus
surplus so this is also added to the
capital in the liability side of a
balance sheet then return on equity is
more the reserves and surplus of the
bank will also be more so when return on
equity is more reserves and surplus will
increase and this will increase the
capital of the bank so same like the
previous case that is return on asset
when the capital of the bank increases
the banks can lend more money to the
public the business of the banks will
improve also the banks will be more
productive more profitable and also more
efficient we already said that when
return on equity is more it means the
bank is more efficient in utilizing the
shareholders fund so this will leave a
message to the public the message is
that the bank is efficient or not
efficient in utilizing shareholders fund
and the shareholders are general public
so what will happen
we've return on equity is less people
will not be willing to invest
will not be willing to take shares of
the bank so in the capital market the
banks will face a difficulty to raise
additional funds
so when return on equity is less it will
be difficult for the banks to raise
additional capital from the capital
market so with lesser capital it is
difficult for the banks to raise its
business or expand its business
activities so coming back to the current
of F we already said that by return on
asset and why return on equity has
become an important current affair the
return on asset and the return on equity
of the public sector banks has been low
or we can say this is being negative so
as we all know public sector banks means
those banks where in which a majority of
the share will be of the government this
is government on banks public sector
banks so what does this indicate it
means that public sector banks are less
efficient and less profitable compared
to its other counterparts the other
scheduled commercial banks so comparing
to its other counterparts the
profitability and efficiency in the
public sector banks are low and this is
the indication from the return on assets
and return on equity of the public
sector banks and this has become an
important concern for the government and
also this is increase the losses of the
public sector banks so this has become
an important current affair compared to
other commercial banks the public sector
banks are performing poorly on the basis
of its return on assets and also return
on equity and this is the reason this
has become an important current affair
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