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CAMELS

The document discusses the CAMELS model for evaluating bank performance and stability. It examines capital adequacy, assets, management, earnings, liquidity, and sensitivity for several Indian banks from 2020-2024. Based on capital ratios like capital adequacy, debt-to-equity, and coverage, Canara Bank was found to be the strongest while SBI was the weakest.

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MANISH JAIN
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8 views

CAMELS

The document discusses the CAMELS model for evaluating bank performance and stability. It examines capital adequacy, assets, management, earnings, liquidity, and sensitivity for several Indian banks from 2020-2024. Based on capital ratios like capital adequacy, debt-to-equity, and coverage, Canara Bank was found to be the strongest while SBI was the weakest.

Uploaded by

MANISH JAIN
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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CAMELS MODEL APPROACH

CAMELS, which stands for Capital, Assets, Management, Earnings, Liquidity, and
Sensitivity, is a method used to evaluate the performance and stability of banks. It's a
rating system originally developed in the United States but now used by many
banking regulators worldwide. The system assigns a score from 1 to 5 to each bank
based on these criteria, with 1 being the strongest and 5 the weakest.
Bank examiners, who are trained by the central bank, assess the adequacy and
quality of a bank's capital, its assets like loans and investments, how well it's
managed, its earnings, liquidity (how easily it can meet its financial obligations), and
its sensitivity to systemic risks. Banks with a rating of 1 are considered very stable,
while those with ratings of 2 or 3 are average. Banks rated 4 or 5 are below average
and closely monitored to ensure they remain viable.
These ratings are not made public and are only shared with the bank's management.
The purpose is to help regulators and bank management understand the health of a
bank and take any necessary actions to maintain stability. CAMELS is an updated
version of the older MACRO rating system and is a crucial tool in bank examination.
REVIEW OF LITERATURE
Various researchers, scholars, and policymakers have conducted numerous studies
over different time periods to assess the financial performance of the banking and
financial sectors. Bodla and Verma (2006) suggested that such ratings could assist
the Reserve Bank of India in identifying banks requiring special supervisory attention.
The CAMEL system primarily aims to identify issues faced by banks themselves and
allows for comparative analysis of different banks' performance.
Hirtle and Lopez (1999) emphasized the confidentiality of a bank's CAMEL rating,
which is only disclosed to senior management for strategic planning purposes and
relevant supervisory staff. CAMEL stands for capital adequacy, asset quality,
management quality, earning ability, and liquidity, representing key components of
bank safety and soundness.
A study by Lace and Stephen (2001) indicated a correlation between bank efficiency
scores and financial ratios used to approximate a bank's CAMEL rating. Barretal.
(2002) noted the significance of CAMEL rating criteria as an essential tool for
examiners and regulators, ensuring the health of banks through a comprehensive
review of various aspects based on diverse information sources.
Said and Saucier (2003) applied the CAMEL rating methodology to assess the
liquidity, solvency, and efficiency of Japanese Banks, focusing on capital adequacy,
asset and management quality, earnings ability, and liquidity position.
OBJECTIVES
Objective of the Study
The objectives of our study are:
1. To analyse the financial position and performance of TWO PUBLIC and TWO
PRIVATE sector bank using CAMEL model.
2. To give recommendations and suggestion for improvement of performance
and financial position of private and public sector banks.

CAPITAL ADEQUACY
1) CAPITAL ADEQUACY RATIO
The capital adequacy ratio is propounded to ensure that banks can take up a
reasonable level of losses arising from operational losses. The higher the CAR
ratio, indicates stronger the bank and the more will be the protection of
investors. The banks are required to maintain 9% capital adequacy ratio as per
latest RBI norms. CAR = (Tier-I Capital + Tier-II Capital)/Risk Weighted Assets.

BANK 2023 2022 2021 2020 AVERAGE RANK


BOB 14.72 16.31 15 13.6 14.9 1
PNB 15.5 14.5 15.9 12.2 14.525 2
Canara Bank 16.68 14.9 12.96 11.9 14.11 3
SBI 14.63 13.85 13.9 13.06 13.86 4

It is found that BOB ranked on the top position with highest CAR of 14.9
followed by PNB (14.52) and CANARA BANK (14.11). SBI scored the lowest position.

2) DEBT EQUITY RATIO


This ratio represents the degree of leverage of a bank. It shows how much
proportion of the bank business is financed through equity and how much
through debt. It is calculated by dividing total borrowings with shareholders’
net worth. Higher ratio is an indication of less protection for the depositors
and creditors and vice-versa.
BANK 2024 2023 2022 2021 AVERAGE RANK
BOB 0.8 1.19 0.86 1.26 1.0275 2
PNB 1.4 1.5 1.5 1.7 1.525 3
Canara Bank 0.6 0.8 0.7 0.9 0.75 1
SBI 1.4 1.5 1.5 1.7 1.525 4

In above table, Canara Bank is on the top position with least average of 0.75 followed
by BOB, PNB & SBI.

3) COVERAGE RATIO
The coverage ratio is a measure of a company’s ability to meet its financial
obligations. In broad terms, the higher the coverage ratio, the better the ability
of the enterprise to fulfil its obligations to its lenders. In case of commercial
banks, there is no standard norm for debt equity ratio.

BANK 2023 2022 2021 2020 AVERAGE RANK


BOB 1.16 1.3 1.2 1.02 1.17 3
PNB 1.08 1.09 1.08 1.03 1.07 4
Canara Bank 1.46 1.42 1.3 1.23 1.3525 1
SBI 1.38 1.23 1.16 1.11 1.22 2

It is found that Canara Bank ranked on the top position with highest Coverage ratio of
1.35 followed by BOB & SBI. PNB scored the lowest position.

COMPOSITE CAPITAL ADEQUACY

CAR DEBT TO EQUITY COVERAGE GROUP RANK


BANK % RANK % RANK % RANK AVERAGE RANK
BOB 14.9 1 1.0275 2 1.17 3 2 2
PNB 14.525 2 1.525 3 1.07 4 3 3
Canara Bank 14.11 3 0.75 1 1.3525 1 1.666667 1
SBI 13.86 4 1.525 4 1.22 2 3.333333 4

On the basis of group averages of three ratios of capital adequacy as expressed


in table, Canara Bank was at the top position with group average of (1), followed by
BOB (2), PNB (3.33). SBI scored the lowest position due to its poor
performance in Debt to Equity ratio and CAR.

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