CAMEL MODEL

The banking sector occupies a very important place in the countrys economy, acting as an intermediary to all industries, ranging from agriculture, construction, textile, manufacturing, and so on. The banking sector thus contributes directly to national income and its overall growth. As the banking sector has a major impact on the economy as a whole, evaluation, analysis, and monitoring of its performance is very important. Many methods are employed to analyse banking performance. One of the popular methods is the CAMELS framework, developed in the early 1970s by federal regulators in the USA. The CAMELS rating system is based upon an evaluation of six critical elements of a financial institutions operations: Capital adequacy, Asset quality, Management soundness, Earnings and profitability, and Liquidity. Under this bank is required to enhance capital adequacy, strengthen asset quality, improve management, increase earnings, maintain liquidity to various financial risks. The analysis was performed for a sample of fifteen banks operating in India, of which five were public sector banks, five were private sector and five were foreign banks. The study covered the financial years 2005-06, 2006-07, 2007-08, 2008-09, 2009-10 and 2010-11. The data for the study consisted of financial variables and financial ratios based on the CAMELS framework, obtained from the Capitaline database. The variables used in the analysis are:

Capital Adequacy: It is measured by the ratio of capital to risk weighted assets (CRAR). A sound capital base strengthens confidence of depositors. Asset Quality: One of the indicators for asset quality is the ratio of non-performing loans to total loans (GNPA). The gross non-performing loans to gross advances ratio is more indicative of the quality of credit decisions made by the bankers. Higher GNPA is indicative of poor credit decision making.

Management: The ratio of non-interest expenditures to total assets (MGNT) can be one of the measures to assess the working of the management. This variable, which includes a variety of expenses, such as payroll, workers compensation and training investment, reflects the management policy stance.

Earnings: It can be measured as the return on asset ratio.

Liquidity: Cash maintained by the banks and balances with central bank, to total asset ratio (LQD) is an indicator of banks liquidity. In general banks with a larger volume of liquid assets are perceived safe, since these assets would allow banks to meet unexpected withdrawals.

Analysis of the Model 1. Capital adequacy ratio is taken from moneycontrol.com for all the banks and they are shown in the table below.

Table 4.19: Capital adequacy ratio of all the fifteen banks from 2006-11 Name of 2006 the bank Axis Bank 11.08 HDFC ICICI Bank Indusind Bank Kotak Mahindra PNB SBI 11.41 13.35 10.54 11.27 11.95 11.88 2007 11.57 13.08 11.69 12.54 13.46 12.29 12.34 12.52 11.08 12.38 2008 13.73 13.73 13.97 11.91 18.65 13.46 13.47 12.04 12.91 10.85 2009 13.69 15.69 15.53 12.33 20.01 14.03 14.25 13.11 14.05 11.18 2010 15.80 17.44 19.41 15.33 18.35 14.16 13.39 13.62 14.36 11.31 2011 12.65 16.22 19.54 15.89 19.92 12.42 11.98 12.96 14.52 13.69

Allahabad 13.37 BOB IDBI SCB Barclays Citi Bank Deutsche Bank HSBC 13.69 14.80

2. Asset Quality Net NPA Net NPA ratio = -------------------Total Loans

Table 4.20: Net NPA ratio of all the fifteen banks from 2006-11 Name of 2006 2007 2008 2009 2010 2011 the bank 0.61% 0.36% 0.35% 0.36% 0.26% Axis Bank 0.75% HDFC ICICI Bank Indusind Bank Kotak Mahindra PNB SBI 0.4% 0.4% 0.42% 0.6% 0.2%

2.27%

1.14%

0.50%

0.28%

0.29% 1.88%

0.76% 1.56%

0.64 % 1.78 %

0.17 % 1.76%

0.53 %

0.85%

Allahabad 0.84 % BOB IDBI SCB Barclays Citi Bank Deutsche Bank HSBC 0.87

1.07 % 0.60%

0.80% 0.47%

0.72 % 0.31%

0.66 % 0.34%

0.79% 0.35%

3. Management Quality Total Advances Total Advances to Total Deposits = . Total Deposits Table 4.21: Total Advances to Total Deposits of all the fifteen banks from 2006-11 Name of 2006 the bank Axis Bank 0.56 HDFC ICICI Bank Indusind Bank Kotak Mahindra PNB SBI 0.60 0.89 0.62 0.97 0.62 0.69 2007 0.63 0.66 0.87 0.63 0.99 0.69 0.77 0.69 0.67 1.44 2008 0.68 0.60 1.12 0.67 0.95 0.72 0.78 0.69 0.7 1.13 2009 0.69 0.65 1 0.71 1.06 0.74 0.73 0.69 0.75 0.92 2010 0.74 0.70 0.74 0.77 0.87 0.75 0.79 0.68 0.73 0.82 2011 0.75 0.72 0.94 0.76 1 0.77 0.81 0.71 0.75 0.87

Allahabad 0.6 BOB IDBI SCB Barclays Citi Bank Deutsche Bank HSBC 0.64 2.03

4. Earnings Quality Net Profit Return on Assets = .............. Total Assets Table 4.21: Net profit to Total Assets of all the fifteen banks from 2006-11 Name of 2006 the bank Axis Bank 1.18 HDFC ICICI Bank Indusind Bank Kotak Mahindra PNB SBI 1.52 0.22 2007 1.10 1.52 0.34 2008 1.24 1.19 2009 1.44 1.22 2010 1.67 1.33 2011 1.68 1.42

1.09 0.89

1.03 0.84 1.26 0.8

1.15 1.01 1.32 0.89

1.39 1.04 0.9 1.09

1.44

1.34

Allahabad 1.42 BOB IDBI SCB Barclays Citi Bank Deutsche Bank HSBC 0.79

1.16 1.21

1.11 1.33

5. Liquidity: Liquid Assets Liquidity Ratio= Current Liabilities

Table 4.22: Liquid Assets to Current Liabilities of all the fifteen banks from 2006-11 Name of the bank Axis Bank HDFC ICICI Bank Indusind Bank Kotak Mahindra PNB SBI Allahabad BOB IDBI SCB Barclays Citi Bank Deutsche Bank HSBC 2006 2007 2008 2009 2010 2011

Analysis of CAMEL MODEL

COMPONENT RATINGS TO THE BANKS Now, after analysing the ratios next task is to give weight age to all the parameters according to the importance of the ratios. Each component will be given weight age according to the importance of itself and ratios covered. The total weight age allocated to the all parameters would be out of 100. The weight age given to different parameters is as follows:

Table 4.19: Components Weight age Parameters Capital Adequacy Asset Quality Management Earnings Liquidity Total Weight age 28% 14% 15% 18% 25% 100%

After allocating the weight age, we have made frequency classes according to the results found from the ratios and they are as follows: