CAMELS MODEL OF PERFORMANCE

EVALUATION OF BANKS

By,
Tripura, Sishira.P, S.Neha, Mythili.M
INDEX
 Introduction
 C
 A
 M
 E
 L
 S
 Conclusion
INTRODUCTION
 In 1994, the RBI established the Board of Financial
Supervision
 The Off-site Monitoring and Surveillance System
(OSMOS) was introduced in 1995 as an additional tool
for supervision of commercial banks.
 In 1995, RBI had set up a working group under the
chairmanship of Shri S. Padmanabhan to review the
banking supervision system. It recommended that the
banks should be rated on a five point scale (A to E) based
on the lines of international CAMELS rating model.
 CAMELS evaluates banks on the following six parameters :-
 Capital Adequacy
 Asset Quality
 Management
 Earnings
 Liquidity
 Sensitivity to Market Risk

Each of the above six parameters are weighted on a scale of 1 to 100 and contains number of sub-
parameters with individual weightages
.
Rating Symbol Rating symbol indicates
A Bank is sound in every respect
B Bank is fundamentally sound but with moderate weaknesses
C financial, operational or compliance weaknesses that give cause for supervisory concern.
D serious or immoderate finance, operational and managerial weaknesses that could impair future viability
E critical financial weaknesses and there is high possibililty of failure in the near future.
C
 Capital adequacy ultimately determines how well
financial institutions can cope with shocks to
their balance sheets.
 A sound capital base strengthens confidence of
depositors. This ratio is used to protect depositors
and promote the stability and efficiency of
financial systems around the world
C
 The following ratios measure capital adequacy:

1) Capital Risk Adequacy Ratio-The ratio of Capital Fund to Risk Weighted Assets
CRAR = Capital/ Total Risk Weighted Credit Exposure

2) Debt Equity Ratio- This ratio indicates the degree of leverage of a bank
Borrowings/ (Share Capital + reserves)

3) Total Advance to Total Asset Ratio-This is the ratio of the total advanced to total asset
Total Advances/ Total Asset

4) Government Securities to Total Investments

Government Securities/ Total Investment
A
 Asset quality determines the strength of financial
institutions against loss of value in assets

 The diminishing value of assets affect the earning

capacity of the institution

 This is measured in relation with the level and

severity of non performing assets
A
 The solvency of financial institutions is typically at
risk when their assets become more impaired hence its
important to monitor indicators of quality in terms of
 Overexposure to specific risks

 Trends in non performing loans

 Health and profitability of bank borrowers – especially

corporate sector…
A
 In emerging markets banking sector assets compromise 80% of total
financial sector assets whereas in developed economies this number is
very low

 In developing economies public deposits continue to be dominant

 Diversification is instrument – specific and institutional on terms of

wider choice , competition & stability

 Its useful to emphasise the dominance of banks in the developing

countries in promoting non-bank financial intermediaries and services
including in development of debt-markets
A
GNPA

 Even where role of banks is apparently diminishing in emerging markets, they

continue to play a leading role in non-banking financing activities, including the
development of financial markets.

 One of the indicators for asset quality is the ratio of non-performing loans to
total loans(GNPA)

 Higher GNPA is indicative of poor credit

decision-making.
A
Non Performing Assets

 As per RBI guidelines. NPAs are classified into sub-standard, doubtful and
loss assets based on the criteria stipulated
 An NPA is a loan or an advance where:
 1. Interest and/or instalment of principal remains overdue for a period of more
than 90
 days in respect of a term loan;
2. The account remains "out-of-order'' in respect of an Overdraft or Cash
Credit (OD/CC);
3. The bill remains overdue for a period of more than 90 days in case of bills
purchased and discounted
A
 . A loan granted for short duration crops will be treated as an
NPA if the installments of principal or interest thereon remain
overdue for two crop seasons
 A loan granted for long duration crops will be treated as an NPA
if the installments of
 principal or interest thereon remain overdue for one crop season.
 The Bank classifies an account as an NPA only if the interest
imposed during any quarter
 is not fully repaid within 90 days from the end of the relevant
quarter.
M
 Management of financial institution is generally evaluated in
terms of
 Capital adequacy
 Asset quality
 Earnings and profitability
 Liquidity and risk sensitive ratings
 In addition… performance evaluation includes compliance with
set norms, ability to plan and react to changing circumstances,
technical competence, leadership and administrative ability. In
effect, management rating is just an amalgam of performance in
the above-mentioned areas.
 Given the qualitative nature of management, it is difficult to
judge its soundness just by looking at financial accounts of the
banks.

 Nevertheless, total expenditure to total income and operating

expense to total expense helps in gauging the management
quality of the banking institutions

 Sound management is key to bank performance but is difficult to

measure. It is primarily a qualitative factor applicable to
individual institutions.
M
 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.
E
 The prime source of increase in capital base is
examined with regards to interest rate policies
and adequacy of provisioning.

 Here the single best indicator used to bring in

earnings is the Return on Assets (ROA).
E
Few ratios are used to assess the quality of income.

 1.Dividend Payout Ratio

 2.Return On Asset

 3.Operating Profit By Average Working Fund

 4.Net Profit To Average Asset

 5.Interest Income To Total Income

 6.Other Income To Total Income

L
 An adequate liquidity position refers to a situation,where
institution can obtain sufficient funds, either by
increasing liabilities or by converting its assets quickly at
a reasonable cost.
L
The liquidity of an institution depends on-

 The institution's short-term need for cash

 Cash on hand

 Available lines of credit

 The liquidity of the institution's assets

 The institution's reputation in the marketplace—how willing will

counterparty is to transact trades with or lend to the institution
L
The ratios suggested to measure liquidity under CAMELS Model are
as follows:
1.Liquidity Asset to Total Asset.
2.Government Securities to Total Asset.
3.Approved Securities to Total Asset.
4.Liquidity Asset to Demand Deposit.
5.Liquidity Asset to Total Deposit.
S
S

What is Sensitivity to
Market Risk?
 S

Capital adequacy - 20%

Asset quality - 20%
Management quality - 25%
Earnings - 15%
Liquidity - 10%
Sensitivity to Market Risk - 10%
S

Rating Symbol Rating symbol indicates

A/1 Bank is sound in every respect

Bank is fundamentally sound but with moderate

B/2 weaknesses

Financial, operational or compliance weaknesses that give

C/3 cause for supervisory concern.

Serious or immoderate finance, operational and managerial

D/4 weaknesses that could impair future viability

Critical financial weaknesses and there is high possibility of

E/5 failure in the near future.
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THANK YOU