Banks' management of their dividend reinvestment plans (DRPs) came in for special attention during the results briefings of the past couple of weeks. Analysts questioned the wisdom of issuing new shares to shareholders who reinvested their dividends when it would lead to lower returns on equity in an environment where the outlook was already gloomy.All listed banks offer DRPs. They are popular with private investors who can use them to build their holdings without having to pay brokerage fees. In some cases, the DRP shares are offered at a discount.For the banks they are a means of increasing capital. All banks are looking to do this at the moment, with Basel III in their sights.But, argue the analysts, why not reduce the dividend payout as a way of increasing equity capital and avoid the dilutionary impact of issuing new shares?The banks say they also have to manage their franking accounts. Franking credits are only of value in the hands of shareholders and banks often sit on large amounts of accumulated credits. By issuing dividends with franking credits attached (the only way they are allowed to distribute credits) and then clawing back the capital through a DRP, the banks can clear their franking accounts and also build their capital base.While acknowledging that it was a balancing act that did not suit all investors (institutional investors usually don't participate in DRPs), bank chief financial officers made it clear that they did not plan to change current practices.Westpac chief financial officer Phil Coffey said: "One of the factors that we have as part of our overall capital base is a very strong franking surplus and what we have elected to do over the last few halves is keep the dividend up a little higher to return those franking credits at a faster pace than would otherwise happen."That's the balance that we have been trying to achieve. We look to make sure we don't offer the DRP with a discount, so it's not as if we are disadvantaging shareholders by selling the shares cheaper."Westpac had a participation rate of around 20 per cent at its most recent issue of dividends, resulting in the issue of 20.3 million new shares (at September 30 the bank had just over three billion shares on issue)Other banks get higher participation rates by offering discounts. ANZ and National Australia Bank both offer a 1.5 per cent discount for DRP shares and have participation rates of around 40 per cent. Both banks issue new shares.Bank of Queensland offers a 2.5 per cent discount. Suncorp has no discount, nor does Macquarie.ANZ chief financial officer Peter Marriott said: "The discount allows us to get the retention at the level to be able to continue to pay out the fully franked dividends and get the franking credits out. But we absorb enough through the DRP to fund our risk-weighted asset growth."ANZ chief executive Mike Smith pointed out that the bank's return on equity was growing, despite the dilutionary impact of issuing new shares