O slideshow foi denunciado.
A Camel Model Analysis on BOB, CUB, South Indian Bank and
Sub Name: Banking
Faculty Name: Prof.S.S.Shanthakumari
Introduction to CAMELS models
During an on-site bank exam, supervisors gather private information, such as details on
problem loans, with which to evaluate a bank's financial condition and to monitor its
compliance with laws and regulatory policies. A key product of such an exam is a supervisory
rating of the bank's overall condition, commonly referred to as a CAMELS rating. This rating
system is used by the three federal banking supervisors (the Federal Reserve, the FDIC, and
the OCC) and other financial supervisory agencies to provide a convenient summary of bank
conditions at the time of an exam.
The acronym "CAMEL" refers to the five components of a bank's condition that are assessed:
Capital adequacy, Asset quality, Management, Earnings, and Liquidity. A sixth component, a
bank's Sensitivity to market risk was added in 1997; hence the acronym was changed to
CAMELS .Ratings are 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.
In 1994, the RBI established the Board of Financial Supervision (BFS), which operates as a
unit of the RBI. The entire supervisory mechanism was realigned to suit the changing needs of
a strong and stable financial system. The supervisory jurisdiction of the BFS was slowly
extended to the entire financial system barring the capital market institutions and the insurance
sector. Its mandate is to strengthen supervision of the financial system by integrating oversight
of the activities of financial services firms. The BFS has also established a sub-committee to
routinely examine auditing practices, quality, and coverage.
In addition to the normal on-site inspections, Reserve Bank of India also conducts off-site
surveillance which particularly focuses on the risk profile of the supervised entity. The Off-site
Monitoring and Surveillance System (OSMOS) were introduced in 1995 as an additional tool
for supervision of commercial banks. It was introduced with the aim to supplement the on-site
inspections. Under off-site system, 12 returns (called DSB returns) are called from the
financial institutions, which focus on supervisory concerns such as capital adequacy, asset
quality, large credits and concentrations, connected lending, earnings and risk exposures (viz.
currency, liquidity and interest rate risks).
In 1995, RBI had set up a working group under the chairmanship of Shri S. Padmanabhanto
review the banking supervision system. The Committee certain recommendations and based on
such suggestions a rating system for domestic and foreign banks based on the international
CAMELS model combining financial management and systems and control elements was
introduced for the inspection cycle commencing from July 1998. 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.
All exam materials are highly confidential, including the CAMELS. A bank's CAMELS rating
is directly known only by the bank's senior management and the appropriate supervisory staff.
CAMELS ratings are never released by supervisory agencies, even on a lagged basis. While
exam results are confidential, the public may infer such supervisory information on bank
conditions based on subsequent bank actions or specific disclosures. Overall, the private
supervisory information gathered during a bank exam is not disclosed to the public by
supervisors, although studies show that it does filter into the financial markets.
S – Sensitivity to Market Risk:
It refers to the risk that changes in market conditions could adversely impact earnings
and/or capital. Market Risk encompasses exposures associated with changes in interest rates,
foreign exchange rates, commodity prices, equity prices, etc. While all of these items are
important, the primary risk in most banks is interest rate risk (IRR), which will be the focus of
this module. The diversified nature of bank operations makes them vulnerable to various kinds of
financial risks. Sensitivity analysis reflects institution’s exposure to interest rate risk, foreign
exchange volatility and equity price risks (these risks are summed in market risk).
Risk sensitivity is mostly evaluated in terms of management’s ability to monitor and
control market risk. Banks are increasingly involved in diversified operations, all of which are
subject to market risk, particularly in the setting of interest rates and the carrying out of foreign
exchange transactions. In countries that allow banks to make trades in stock markets or
commodity exchanges, there is also a need to monitor indicators of equity and commodity price
Interest Rate Risk:
In the most simplistic terms, interest rate risk is a balancing act. Banks are trying to
balance the quantity of reprising assets with the quantity of reprising liabilities. For example,
when a bank has more liabilities reprising in a rising rate environment than assets reprising, the
net interest margin (NIM) shrinks. Conversely, if your bank is asset sensitive in a rising interest
rate environment, your NIM will improve because you have more assets reprising at higher rates.
Liquidity risk is financial risk due to uncertain liquidity. An institution might lose
liquidity if its credit rating falls, it experiences sudden unexpected cash outflows, or some other
event causes counterparties to avoid trading with or lending to the institution. A firm is also
exposed to liquidity risk if markets on which it depends are subject to loss of liquidity.
Business risk is managed with a long-term focus. Techniques include the careful
development of business plans and appropriate management oversight. Book-value accounting is
generally used, so the issue of day-to-day performance is not material. The focus is on achieving
a good return on investment over an extended horizon. Market risk is managed with a short-term
focus. Long-term losses are avoided by avoiding losses from one day to the next. On a tactical
level, traders and portfolio managers employ a variety of risk metrics —duration and convexity,
the Greeks, beta, etc.—to assess their exposures. These allow them to identify and reduce any
exposures they might consider excessive. On a more strategic level, organizations manage
market risk by applying risk limits to traders' or portfolio managers' activities. Increasingly,
value-at-risk is being used to define and monitor these limits. Some organizations also apply
stress testing to their portfolios
It is important for a bank to maintain depositors’ confidence and preventing the bank from going
bankrupt. It reflects the overall financial condition of banks and also the ability of management
to meet the need of additional capital. The following ratios measure capital adequacy:
Capital Adequacy Ratio (CAR): The capital adequacy ratio is developed to ensure that
banks can absorb a reasonable level of losses occurred due to operational losses and
determine the capacity of the bank in meeting the losses. As per the latest RBI norms, the
banks should have a CAR of 9 per cent.
Debt-Equity Ratio (D/E): This ratio indicates the degree of leverage of a bank. It indicates
how much of the bank business is financed through debt and how much through equity.
Advance to Assets Ratio (Adv/Ast): This is the ratio indicates a bank’s aggressiveness in
lending which ultimately results in better profitability.
Government Securities to Total Investments (G-sec/Inv): It is an important indicator
showing the risk-taking ability of the bank. It is a bank’s strategy to have high profits, high
risk or low profits, low risk.
Table 1: Composite Ranking of Banks in Capital Adequacy:
AVG RANK AVG RANK AVG RANK AVG RANK AVG RANK
BOB 14.05 2 63.78 3 15.9 3 77.88 2 2.5 2
12.01 3 63.25 4 6.2 1 73.88 4 3 3.5
9.59 4 76.99 1 17.11 4 76.02 3 3 3.5
CUB 16.52 1 64.45 2 8.93 2 86.2 1 1.5 1
From table 1, on the basis of group averages of four sub-parameters of Capital Adequacy, CUB
Bank is at the top position with group average of 1.5, followed by BOB is second position and
South Indian bank, Dhanlaxmi bank stood at the last position due to its poor performance in
CAR, Advances to assets and also due to less investment in Govt. Securities.
The quality of assets is an important parameter to gauge the strength of bank. The prime motto
behind measuring the assets quality is to ascertain the component of non-performing assets as a
percentage of the total assets. The ratios necessary to assess the assets quality are:
Net NPAs to Total Assets (NNPAs/TA): This ratio discloses the efficiency of bank in
assessing the credit risk and, to an extent, recovering the debts.
Net NPA to Total Asset = Net NPA/ Total Asset
Net NPAs to Net Advances (NNPAs/NA): It is the most standard measure of assets quality
measuring the net non-performing assets as a percentage to net advances.
Net NPA to Total Advances = Net NPA/ Total Loan
Total Investments to Total Assets (TI/TA): It indicates the extent of deployment of assets
in investment as against advances.
Total investment to Total Asset=Total Inv/Total Assets
Gross NPA to Total Advances: This ratio is used to check whether the bank's gross NPAs
are increasing quarter on quarter or year on year. If it is, indicating that the bank is adding a
fresh stock of bad loans. It would mean the bank is either not exercising enough caution
when offering loans in terms of following up with borrowers on timely repayments.
Gross NPA to Total Advances = Gross NPA/ Total Loan
Advances Yield Ratio: Yield on advances, is another important ratio, which helps us to
measure the quality of advances. Here yield means interest income received on the advances
of the bank. Increases in advance yield ratio is an indicator of sound asset quality.
Advances Yield Ratio = Interest income on advances / Total advances
Table 2: Composite Ranking of Banks in Asset Quality:
Net NPA to
Net NPA to
AVG RANK AVG RANK AVG RANK AVG RANK AVG RANK AVG RANK
BOB .41 1 1.45 3 1.27
1 .75 4 27 2 2.2 2..5
.96 2 .60 1 1.71 2 0.11 1 28 3 1.8 1
Dhanlaxmi bank 3.29 4 1.76 4 7.00 4 0.59 3 33 4 3,8 4
CUB 1.30 3 1.23 2 1.86 3 .45 2 22.83 1 2.2 2.5
From table 2, on the basis of group averages of sub-parameters of assets quality, South Indian
Bank had the highest rank, followed by CUB and BOB .Dhanlaxmi bank was positioned last in
terms of Assets Quality.
Management efficiency is another important element of the CAMEL Model. The ratio in this
segment involves subjective analysis to measure the efficiency and effectiveness of
management. The ratios used to evaluate management efficiency are described as
Total Advance to Total Deposits: This ratio measures the efficiency and ability of the
banks management in converting the deposits available with the banks (excluding other
funds like equity capital, etc.) into high earning advances. Total deposits include demand
deposits, saving deposits, term deposit and deposit of other bank. Total advances also
include the receivables.
Total Advance to Total Deposits=Total Advance/ Total Deposit
Profit per Employee: This ratio shows the surplus earned per employee. It is arrived at by
dividing profit after tax earned by the bank by the total number of employee. The higher the
ratio shows better management efficiency.
Profit per Employee =Profit after Tax/ No. of Employees
Business per Employee: Revenue per employee is a measure of how efficiently a particular bank is
utilizing its employees. Ideally, a bank wants the highest business per employee possible, as it denotes
higher productivity. In general, rising revenue per employee is a positive sign that suggests the bank is
finding ways to squeeze more sales/revenues out of each of its employee.
Business per Employee =Total Income/ No. of Employees
Table 3: Composite Ranking of Banks in Management Efficiency:
Total Advances to
AVG RANK AVG RANK AVG RANK AVG RANK
BOB 74.83 1 6.04 1 23.98 1 1 1
South Indian Bank
72% 3 0.04 3 11.54 2 2.6 3
Dhanlaxmi bank 61% 4 -10.6 4 8.99 4 4 4
CUB 74% 2 0.09 2 9.65 3 2.3 2
From table 3, on the basis of group averages of three sub-parameters of Management Efficiency
BOB is at the top position with group average of 1, followed by CUB and South Indian Bank.
Dhanlaxmi bank bank stood at the last position due to its poor performance in Business per
Employee and Profit per Employee respectively.
The quality of earnings is a very important criterion that determines the ability of a bank to earn
consistently. It basically determines the profitability of bank and explains its sustainability and
growth in earnings in future. The following ratios explain the quality of income generation.
Spread to Total Asset: It is the difference between the interest income and interest
expended as percentage of total assets. Interest expended includes interest paid on deposits.
Spread indicates a bank`s ability to with stand pressure on margins and higher the spread, the
Total asset = (interest income – interest Expended / total asset)*100
% Growth in Net profit: Net profits are obtained after deducting income tax and if net
profit is not sufficient, the firm shall not be able to achieve a satisfactory return on
investment. Growth in net profit helps the bank to face adverse economic conditions.
Percentage growth in net profit can be found out by using the following formula
% Growth in Net profit =
Dividend payout ratio: Dividend payout ratio shows the percentage of profit shared with
the shareholders. The more the ratio will increase the goodwill of the bank in the share
Dividend pay out ratio = Dividend/ Net profit
Interest income to Total Income: Interest income is a basic source of revenue for banks.
The interest income total income indicates the ability of the bank in generating income from
its lending. In other words, this ratio measures the income from lending operations as a
percentage of the total income generated by the bank in a year. Interest income includes
income on advances, interest on deposits with the RBI, and dividend income.
Interest income to Total Income = Interest Income/ Total Income
Table 4: Composite Ranking of Banks in Earning Quality
Interest Spread % Growth in
Interest income to
AVG RANK AVG RANK AVG RANK AVG RANK AVG RANK
BOB 5.47% 4 25.16 2 3.20 1 .9070 3 2.5 2.5
6.90% 3 39.4 1 .60 3 .9145 2 2.25 1
Dhanlaxmi bank 9.34% 1 -4.14 4 0 4 0.9379 1 2.5 2.5
CUB 7.22 2 13.8 3 1.10 2 0.8697 4 2.75 4
From table 4, on the basis of group averages of 4 sub-parameters of Earnings Quality, South Indian Bank
is at the top followed by Dhanlaxmi Bank and BOB. CUB was at the last position due to poor
performance in Interest income to Total income.
Risk of liquidity is curse to the image of bank. Bank has to take a proper care to hedge the
liquidity risk; at the same time ensuring good percentage of funds are invested in high return
generating securities, so that it is in a position to generate profit with provision liquidity to
the depositors. The following ratios are used to measure the liquidity:
Liquidity Asset to Total Asset: Liquidity for a bank means the ability to meet its financial
obligations as they come due. Bank lending finances investments in relatively illiquid assets,
but it fund its loans with mostly short term liabilities. Thus one of the main challenges to a
bank is ensuring its own liquidity under all reasonable conditions. Liquid assets include cash
in hand, balance with the RBI, balance with other banks (both in India and abroad), and
money at call and short notice. Total asset include the revaluations of all the assets. The
proportion of liquid asset to total asset indicates the overall liquidity position of the bank.
Liquidity Asset to Total Asset = Liquidity Asset/ Total Asset
Liquidity Assets to Total Deposits: This ratio measures the liquidity available to the
deposits of a bank. Total deposits include demand deposits, savings deposits, term deposits
and deposits of other financial institutions .Liquid assets include cash in hand, balance with
the RBI, balance with other banks (both in India and abroad), and money at call and short
Liquidity Asset to Total Deposits = Liquidity Asset/ Total Deposit
Government securities Total Asset Government Securities are the most liquid and safe
investments. This ratio measures the government securities as a proportion of total assets.
Banks invest in government securities primarily to meet their SLR requirements, which are
around 25% of net demand and time liabilities. This ratio measures the risk involved in the
assets hand by a bank.
Government security Total Asset = Government Securities/ Total Asset
Table 5: Composite Ranking of Banks in Liquidity:
Liquidity Asset to
Liquidity Asset to
AVG RANK AVG RANK AVG RANK AVG RANK
BOB .2074 2 .2467 2 0.4250 1 1.7 1.5
.6081 1 .6925 1 .2089 3 1.7 1.5
Dhanlaxmi bank .0898 3 .1059 3 0.2569 2 2.7 3
CUB 0.091 4 .1053 4 0.1968 4 4 4
From table 5, on the basis of group averages of 3 sub-parameters of Liquidity, South Indian
Bank and BOB was at the top followed by Dhanlaxmi bank. CUB was at the last position.
As stated in initial part of this paper, CAMEL model is used to rating the banks according to
Table-6: Composite ranking: Overall Performance
C A M E L Avg Rank
BOB 2 2.5 1 2.5 1.5 1.9 1
3.5 1 3 1 1.5 2 2
Dhanlaxmi bank 3.5 4 4 2.5 3 3.4 4
CUB 1 2.5 2 4 4 2.7 3
CAMEL approach is significant tool to assess the relative financial strength of a bank and to
suggest necessary measures to improve weaknesses of a bank. In India, RBI adopted this
approach in 1996 followed on the recommendations of Padmanabham Working Group (1995)
committee. It is clear from table no 6 that BOB is ranked at top position with composite average
1.9, followed by South Indian Bank (2), Punjab CUB (2.7). Dhanlaxmi bank was at the
bottom most position. A good bank is not only the financial heart of the community, but also one
with an obligation of helping in every possible manner to improve the economic conditions of
the common people.
BOB Annual Report-15
CUB annual Report-15
South Indian Bank Annual Report-15
Dhanlaxmi bank Annual Report-15
Dr. K. Sriharsha Reddy, Relative Performance of Commercial Banks in India using Camel
Approach, The Research Journal of Economics and Business Studies,ISSN:2251-1555
K.V.N. Prasad, G. Ravinder, A Camel Model Analysis of Nationalized Banks in India, (
2012), International Journal of Trade and Commerce, Volume 1, No. 1, pp. 23-33 ISSN-