What do you mean by Camels Ratings :Camels Ratings :

anks are been rated on various parameters,based on financial and non financial performance.Regulators,analysts and also investors wants to know the financial position of banks and one of the method by which they analyze the position of banks position is called CAMELS, and here in Camels each and every word refers to specific category of performance. C - Capital Adequacy : This parameter indicates the bank's capacity to maintain capital commensurate with the nature and extent of all types of risks, as also the ability of the manager of the bank to identify, monitor,measure and control such types of risks A - Asset Quality : Thiis parameter is very helpful in measuring the magnitude of credit risk prevailing in the bank due to its composition and quality of loans, advances, investments and off balance sheet activities M - Management Quality : This parameter signals the ability of the board of directors, senior managers including top management to identify, measure, monitor and control risks associated with banking, this qualitative measure uses risk management policies and processes as indicators of sound management. E - Earnings : This parameter indicates not only the amount of and the trend in earnings, but it also analyzes the robustness of expected earnings growth in future. L - Liquidity : This parameter takes into a/c the adequacy of the bank's current and potential sources of liquidity, including the strength of its funds management practices. S - Sensitivity to Market Risk :This is a recent addition to the ratings parameters and it reflects the degree to which changes in interest rates, exchange rates, commodity prices and equity prices can affect earnings and hence the bank's capital. The components of CAMELS rating system comprise of both objective and subjective parameters. Some illustrative components are as follows:Capital Adequacy : Size of the bank

Quality of capital Volume of interior quality assets Retained earnings Access to capital markets Bank's growth experience, plans and prospects

Asset Quality : Volume of classifications

Volume of concentrations Special mention loans ratio and trends Volume and character of insider transactions

Management Factors : Compliance with banking laws and regulations

Tendencies towards self dealing

Technical competence, leadership of middle and senior management Adequacy and compliance with internal policies Ability to plan and respond to changing circumstances Adequacy of directors Existence and adequacy of quality staff and programmes

Earnings : Return of assets compared to peer group averages and bank's own trends

Adequacy of provisions for loan losses Quality of earnings Dividend payout ratio in relation to the adequacy of bank capital Material components and income and expenses compared to peers and bank's own trends

Liquidity : Availability of assets readily convertible to cash without undue loss

Adequacy of liquidity sources compared to present and future needs Access to money markets Ability to make safe and sell certain pools of assets Level of diversification of funding sources ( on and off balance sheet ) Trends and stability of deposits Management competence to identify, measure, monitor and control liquidity position Degree of reliance of short term volatiles sources of funds.

Sensitivity to market risk : Ability of management to identify, measure, monitor and control interest rate risk as well as price and foreign exchange risk where applicable and material to an institution

Sensitivity of the financial institution's net earnings or the economic value of its capital to changes in interest rates under various scenarios and stress environments Volume, Composition and volatility of any foreign exchange or other trading positions taken by the financial institution Actual or management to identify, measure, monitor and control interest rate risk as well as price and foreign exchange risk where applicable and material to an institution

Internationally and in India these ratings are used by regulators to determine the supervision policies for individual banks. Ratings assigned for each component in addition to the overall rating of a bank's financial condition. The ratings are assigned on a scale from 1 to 5 . Banks with ratings of 1 or 2 are considered to present few, if any, supervisory concerns, while banks with ratings of 3 , 4 or 5 present moderate to extreme degrees of supervisory concern. The rating analysis and interpretation are typically done along the following lines :

1.0 - 1.4 : Strong : Sound in every respect, no supervisory responses required. 1.6 - 2.4 : Satisfactory : Fundamentally sound with modest correctable weakness. 2.6 - 3.4 : Fair :Combination of weakness if not redressed will become severe. 3.6 - 4.4 : Marginal : Immoderate weakness unless properly addressed could impair future viability of the banks. Needs close supervision. 4.6 - 5.0 : Unsatisfactory : High risk of failure in the near term. Under constant supervision/ cease and desist order.

CAMEL RATING SYSTEM The CAMEL rating system is based upon an evaluation of five critical elements of acredit union's operations: Capital Adequacy, Asset Quality, Management, Earnings andAsset/Liability Management. This rating system is designed to take into account andreflect all significant financial and operational factors examiners assess in their evaluationof a credit union's performance. Credit unions are rated using a combination of financialratios and examiner judgment.Since the composite CAMEL rating is an indicator of the viability of a credit union, it isimportant that examiners rate credit unions based on their performance in absolute termsrather than against peer averages or predetermined benchmarks. The examiner must use professional judgment and consider both qualitative and quantitative factors whenanalyzing a credit union's performance. Since numbers are often lagging indicators of acredit union's condition, the examiner must also conduct a qualitative analysis of currentand projected operations when assigning CAMEL ratings.Although the CAMEL composite rating should normally bear a close relationship to thecomponent ratings, the examiner should not derive the composite rating solely bycomputing an arithmetic average of the component ratings. Following are generaldefinitions the examiner should use for assigning the credit union's CAMEL compositerating: NEED OF CAMEL RATING SYSTEM IN BANKS In 1979, the bank regulatory agencies created the Uniform Financial Institutions RatingSystem (UFIRS). Under the original UFIRS a bank was assigned ratings based on performance in five areas: the adequacy of Capital, the quality of Assets, the capability of Management, the quality and level of Earnings and the adequacy of Liquidity. Bank supervisors assigned a 1 through 5 rating for each of these components and a compositerating for the bank. This 1 through 5 composite rating was known primarily by theacronym CAMEL.A bank that received a CAMEL of 1 was considered sound in every respect and generallyhad component ratings of 1 or 2 while a bank with a CAMEL of 5 exhibited unsafe andunsound practices or conditions, critically deficient performance and was of the greatestsupervisory concern. While the CAMEL rating normally bore close relation to the fivecomponent ratings, it was not the result of averaging those five grades. Rather,supervisors consider each institution's specific situation when weighing componentratings and, more generally, review all relevant factors when assigning ratings.CAMEL ratings reflect the excellent banking conditions and performance over the lastseveral years. There is a need for bank employees to have sufficient knowledge of therating system, in order to

guide the banking growth rate in the positive direction. Lack of knowledge among employees regarding banking performance indicators affects banksnegatively as these are the basis for any banking action.

As summary measures of the private supervisory information gathered on financial statement analysis and during onsite bank examinations, CAMELS (or CAMEL) ratings are generally regarded to be highly effective and useful in the supervisory monitoring of financial institutions in need of attention. The fix key factors that a banking regulator examines in a CAMELS assessment are:

C Capital adequacy A Asset quality M Management quality E Earnings L Liquidity S Sensitivity to Market Risk

Bank supervisory authorities assign each bank a score on a scale of one (best) to five (worst) for each factor. If a bank has an average score of one or two it is considered to be a high-quality institution, while banks with scores of three or more are considered less-than-satisfactory. If CAMELS ratings were made public, they are very likely to have an impact on the prices of bank securities, and the current information-sharing relationship between examiners and bankers for supervisory monitoring could be adversely changed. As a result, CAMEL ratings are often held in high confidentiality and known only to a financial institutions top management. You cant disclose Camel ratings; thats a big-time mistakeFor a big bank, a Camels of 2 is a questionable rating, Big banks ought to be 1s across the board. - Tony Plath, Professor of Finance at the University of North Carolina, Charlotte. The Finance 3.0 Financial Institution Analysis CAMELS Approach program contains a library of 8 courses designed to help you learn the CAMELS ratings analysis approach and framework. A step-by-step walk through of the ins and outs of the CAMELS rating approach are covered, providing a comprehensive and detailed understanding of CAMELS. The 8 courses covered in the Finance 3.0 Liquidity Management & Contingency Funding Plan program are:

Overview of CAMELS Earnings Ability Capital Adequacy Asset Quality Management Competence Liquidity Risk

Sensitivity to Market Risk Composite Rating

Enrollment into the Finance 3.0 Financial Institution Analysis CAMELS Approach program also provides you with access to a comprehensive collection of Measurement Tools and Benchmarking Data to help you immediately take you have learnt and put it into practice.

CAR

The Committee on Banking Regulations and Supervisory Practices (Basel Committee) had released the guidelines on capital measures and capital standards in July 1988 which were been accepted by Central Banks in various countries including RBI. In India it has been implemented by RBI w.e.f. 1.4.92 Objectives of CAR : The fundamental objective behind the norms is to strengthen the soundness and stability of the banking system. Capital Adequacy Ratio or CAR or CRAR : It is ratio of capital fund to risk weighted assets expressed in percentage terms i.e. Minimum requirements of capital fund in India: * Existing Banks 09 % * New Private Sector Banks 10 % * Banks undertaking Insurance business 10 % * Local Area Banks 15% Tier I Capital should at no point of time be less than 50% of the total capital. This implies that Tier II cannot be more than 50% of the total capital. Capital fund Capital Fund has two tiers - Tier I capital include *paid-up capital *statutory reserves *other disclosed free reserves *capital reserves representing surplus arising out of sale proceeds of assets. Minus *equity investments in subsidiaries, *intangible assets, and *losses in the current period and those brought forward from previous periods

to work out the Tier I capital. Tier II capital consists of: *Un-disclosed reserves and cumulative perpetual preference shares: *Revaluation Reserves (at a discount of 55 percent while determining their value for inclusion in Tier II capital) *General Provisions and Loss Reserves upto a maximum of 1.25% of weighted risk assets: *Investment fluctuation reserve not subject to 1.25% restriction *Hybrid debt capital Instruments (say bonds): *Subordinated debt (long term unsecured loans: Risk weighted assets - Fund Based : Risk weighted assets mean fund based assets such as cash, loans, investments and other assets. Degrees of credit risk expressed as percentage weights have been assigned by RBI to each such assets. Non-funded (Off-Balance sheet) Items : The credit risk exposure attached to off-balance sheet items has to be first calculated by multiplying the face amount of each of the off-balance sheet items by the credit conversion factor. This will then have to be again multiplied by the relevant weightage. Reporting requirements : Banks are also required to disclose in their balance sheet the quantum of Tier I and Tier II capital fund, under disclosure norms. An annual return has to be submitted by each bank indicating capital funds, conversion of offbalance sheet/non-funded exposures, calculation of risk -weighted assets, and calculations of capital to risk assets ratio,

Definition of 'Capital Adequacy Ratio - CAR'

A measure of a bank's capital. It is expressed as a percentage of a bank's risk weighted credit exposures.

Also known as "Capital to Risk Weighted Assets Ratio (CRAR)." Read more: http://www.investopedia.com/terms/c/capitaladequacyratio.asp#ixzz1rKOOrnjC

Investopedia explains 'Capital Adequacy Ratio - CAR'

This ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world. Two types of capital are measured: tier one capital, which can absorb losses without a bank being required to cease trading, and tier two capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors. Read more: http://www.investopedia.com/terms/c/capitaladequacyratio.asp#ixzz1rKOSxYew

Bank capital plays a very important role in the safety and soundness of individual banks and the banking system.Basel Committee for Bank Supervision (BCBS) has prescribed a set of norms for the capital requirement for the banks in 1988 known as Basel Accord I.These norms ensure that capital should be adequate to absorb unexpected losses or risks involved.If there is higher risk,then it would be needed to backed up with Capital and Vice versa.All the countries establish their own guidelines for risk based capital framework known as Capital Adequacy Norms. Capital Adequacy measures the strength of the bank.Capital Adequacy Ratio is also known as Capital Risk Weighted Assets Ratio. The focus of Capital Adequacy Ratio under Basel I norms was on credit risk and was calculated as follows: Capital Adequacy Ratio = Tier I Capital+Tier II Capital / Risk Weighted Assets Basel Committee has revised the guidelines in the year June 2001 known as Basel II Norms.There are Three Pillars of Basel Accord II. 1.Minimum Capital Requirement: Based on certain calculations minimum capital requirement has to be maintained. 2.The Supervisory Review Process: The Central Bank (RBI) of the country has to ensure that each bank has an adequate capital to adopt better management techniques. 3.Market Discipline: There should be a mandatory disclosure on risk management practices with transparency. Capital Adequacy Ratio in New Accord of Basel II: Capital Adequacy Ratio = Total Capital(Tier I Capital+Tier II Capital)/ Market Risk+ Credit Risk + Operation Risk Calculation of Capital Adequacy Ratio: Total Capital:

Total Capital constitutes of Tier I Capital and Tier II Capital less shareholding in other banks. Tier I Capital = Ordinary Capital+Retained Earnings& Share Premium - Intangible assets. Tier II Capital = Undisclosed Reserves+General Bad Debt Provision+ Revaluation Reserve + Subordinate debt+ Redeemable Preference shares Tier III Capital: Tier III Capital includes subordinate debt with a maturity of at least 2 years. This is addition or substitution to the Tier II Capital t6o cover market risk alone.Tier III Capital should not cover more than 250% of Tier I capital allocated to market risk. Types of Risks involved in Basel II & their computation: Credit Risk: If the counter party do not settle the dues within the stipulated time or thereafter,this type of risk arises. It includes risks on derivatives, replacement risk and Principal risk. For measuring the risk the following approach are used: a) Standardised Approach b) Internal Rating Based Foundation Approach c) Internal Rating Based Advanced Approach Market Risk: This is the risk or loss arising on or off Balance Sheet due to the movement of prices in foreign currencies,commodities,equities and bonds.With regard to market risk,there are two method for computation. a) Standardised Approach b) Internal Model Approach Operation Risk: This type of risk or loss results from inadequate or failure in the corporate governance or internal processes,people or system.RBI adopts the following measurement techniques for calculation a) Basic Indicator Approach b) Standardised Approach c) Advanced Measurement Approach Though different approaches are available for calculation of Risk, RBI advises Indian Banks to adopt the standardized approach initially before transition to Advanced Approaches. Standardised Approach: Basel Committee for Banking Supervision (BCBS) suggests various risk weighted percentages for different category of assets in the Balance Sheet and Off Balance sheet items (such as

guarantees,letter of Credit,Underwriting,Sale &repurchase of transaction etc) known as Risk Buckets. The BCBS has fixed various risk weights from 0% to 100% based on the risk perceived on each of that particular on and off balance sheet items. In case of Balance sheet asset, the face value of credit risk asset amount should be multiplied by risk bucket to arrive at the amount of risk weighted asset exposure. For off balance sheet items,the face value credit risk exposure amount has to be multiplied with credit conversion factor to arrive at the credit risk exposure.Then,it has to be multiplied to relevant weight percentage to arrive at amount risk of risk weighted exposure. Banks have to disclose Tier I capital,Tier II Capital under disclosure norms in the Balance Sheet.They also have to submit a report on capital funds,conversion of on and off balance sheet items,calculation of risk weighted assets,capital to risk asset ratio. Minimum Requirement of Capital Adequacy Ratio(CAR): Under Basel II norms,8% is the prescribed Capital Adequacy Norm. In case of Scheduled Commercial Banks CAR= 9% For New Private Sector Banks CAR = 10% For Banks undertaking Insurance Business CAR = 10% and For Local Area Banks CAR =15% At the end of March 2008, there were 2 Scheduled Commercial Banks(1 Private Sector Bank & 1 Foreign bank)having 0-9% of Capital Adequacy Ratio,55 Scheduled Commercial Banks( 28 Public Sector Banks,17 Private Sector Banks & 10 Foreign Banks)were having CAR between 10%-15% and 22 Scheduled Commercial Banks (19 Foreign Banks & 3 Private Sector Banks) having CAR of 15% and above according to RBI Publications.

Definition of 'Asset Quality Rating' A review or evaluation assessing the credit risk associated with a particular asset. These assets usually require interest payments - such as a loans and investment portfolios. How effective management is in controlling and monitoring credit risk can also have an affect on the what kind of credit rating is given.

Investopedia explains 'Asset Quality Rating' Many factors are considered when rating asset quality. For example, consideration must be put into whether or not a portfolio is appropriately diversified, what regulations or rules have been put in to place to limit credit risks and how efficiently operations are being utilized. Typically, a rating of one shows that asset quality is good and there is very little credit risk, while a rating of five can signify that there are major asset quality problems and issues that need to be managed.

Read more: http://www.investopedia.com/terms/a/assetqualityrating.asp#ixzz1rKPirNXD