Date post: | 09-Apr-2018 |
Category: |
Documents |
Upload: | pawandeep-singh-bhandari |
View: | 221 times |
Download: | 0 times |
of 40
8/8/2019 Cbm Project-2
1/40
PROJECT ON
PERFORMANCE ANALYSIS OF
BANKS THROUGH CAMEL FRAMEWORK
ACEDEMIC SESSION: 2009-11
Submitted to: Submitted by:
Dr. Vidya Sekhri Ankit Chaturvedi (09254)
(Professor and chairperson of Finance) Saurabh Agrawal (09283)
Pawandeep Singh (09275)
INSTITUTE OF MANAGEMENT STUDIES
LAL QUAN, GHAZIABAD 201009
8/8/2019 Cbm Project-2
2/40
8/8/2019 Cbm Project-2
3/40
Performance Appraisal of Banks through Camel framework..
ACKNOWLEDGMENT
Words are the dress of thoughts, appreciating and acknowledging those who are
responsible for the successful completion of the project.
Our sincerity gratitude goes to Prof. Sanjau
who assigned us responsibility to work on this project and provided us all the help,
guidance and encouragement to complete this project.
The encouragement and guidance given by Dr. Vidya Sekhri have made this a
personally rewarding experience.We thank him for his support and inspiration,without which, understanding the intricacies of the project would have been
exponentially difficult.
We are sincerely grateful to our friends who provided us with the time and financial
assistance and inspiration needed to prepare this training report in congenial manner.
3
8/8/2019 Cbm Project-2
4/40
TABLE OF CONTENT
INSTITUTE OF MANAGEMENT STUDIES - GHAZIABAD4
8/8/2019 Cbm Project-2
5/40
Performance Appraisal of Banks through Camel framework..
S.No.
Ppon PAGENO.
1. Executive summary 5-6
2. Objective 7
3. Introduction 8-16
4. CAMEL Framework 17-24
5. Literature Review 25
6. Methodology 26
7. Data Analysis 27-35
8. Conclusion and Findings 36
9 Recommendation 37
10. Bibliography 38
EXECUTIVE SUMMARY
5
8/8/2019 Cbm Project-2
6/40
The banking sector has been undergoing a complex, but comprehensive phase of
restructuring since 1991, with a view to make it sound, efficient, and at the same time
forging its links firmly with the real sector for promotion of savings, investment and
growth. Although a complete turnaround in banking sector performance is not expected
till the completion of reforms, signs of improvement are visible in some indicators under
the CAMEL framework. Under this bank is required to enhance capital adequacy,
strengthen asset quality, improve management, increase earnings and reduce sensitivity to
various financial risks. The almost simultaneous nature of these developments makes it
difficult to disentangle the positive impact of reform measures. Keeping this in mind,
signs of improvements and deteriorations are discussed for the three groups of scheduled
banks in the following sections.
CAMEL Framework
Supervisory framework, consistent with international norms, covers risk-monitoring
factors for evaluating the performance of banks. This framework involves the analyses of
six groups of indicators reflecting the health of financial institutions. The indicators are as
follows:
CAPITAL ADEQUACY
ASSET QUALITY
MANAGEMENT SOUNDNESS
EARNINGS & PROFITABILITY
LIQUIDITY
The whole banking scenario has changed in the very recent past on the recommendations
of Narasimham Committee. Further BASELL II Norms were introduced to
internationally standardize processes and make the banking industry more adaptive to the
sensitive market risks. The fact that banks work under the most volatile conditions and
the banking industry as such in the booming phase makes it an interesting subject ofstudy. Amongst these reforms and restructuring the CAMELS Framework has its own
contribution to the way modern banking is looked up on now. The attempt here is to see
how various ratios have been used and interpreted to reveal a banks performance and how
this particular model encompasses a wide range of parameters making it a widely used
and accepted model in todays scenario.
INSTITUTE OF MANAGEMENT STUDIES - GHAZIABAD6
8/8/2019 Cbm Project-2
7/40
Performance Appraisal of Banks through Camel framework..
OBJECTIVES
7
8/8/2019 Cbm Project-2
8/40
Performance analysis of selected banks by investigating individual financial ratios
falling under the CAMEL framework.
Also comparing top 3 private and public banks and finding out there competent
areas and management effectiveness.
INTRODUCTION TO THE BANKING REFORM
INSTITUTE OF MANAGEMENT STUDIES - GHAZIABAD8
8/8/2019 Cbm Project-2
9/40
Performance Appraisal of Banks through Camel framework..
In 1991, the Indian economy went through a process of economic liberalization, which
was followed up by the initiation of fundamental reforms in the banking sector in 1992.
The banking reform package was based on the recommendations proposed by the
Narsimhan Committee Report (1991) that advocated a move to a more market oriented
banking system, which would operate in an environment of prudential regulation and
transparent accounting. One of the primary motives behind this drive was to introduce an
element of market discipline into the regulatory process that would reinforce the
supervisory effort of the Reserve Bank of India (RBI). Market discipline, especially in the
financial liberalization phase, reinforces regulatory and supervisory efforts and provides a
strong incentive to banks to conduct their business in a prudent and efficient manner and
to maintain adequate capital as a cushion against risk exposures. Recognizing that the
success of economic reforms was contingent on the success of financial sector reform as
well, the government initiated a fundamental banking sector reform package in 1992.
Banking sector, the world over, is known for the adoption of multidimensional strategies
from time to time with varying degrees of success. Banks are very important for the
smooth functioning of financial markets as they serve as repositories of vital financial
information and can potentially alleviate the problems created by informationasymmetries. From a central banks perspective, such high-quality disclosures help the
early detection of problems faced by banks in the market and reduce the severity of
market disruptions. Consequently, the RBI as part and parcel of the financial sector
deregulation, attempted to enhance the transparency of the annual reports of Indian banks
by, among other things, introducing stricter income recognition and asset classification
rules, enhancing the capital adequacy norms, and by requiring a number of additional
disclosures sought by investors to make better cash flow and risk assessments.
During the pre economic reforms period, commercial banks & development financial
institutions were functioning distinctly, the former specializing in short & medium term
financing, while the latter on long term lending & project financing.
9
8/8/2019 Cbm Project-2
10/40
Commercial banks were accessing short term low cost funds thru savings investments
like current accounts, savings bank accounts & short duration fixed deposits, besides
collection float. Development Financial Institutions (DFIs) on the other hand, were
essentially depending on budget allocations for long term lending at a concessionary rate
of interest.
The scenario has changed radically during the post reforms period, with the resolve of the
government not to fund the DFIs through budget allocations. DFIs like IDBI, IFCI &
ICICI had posted dismal financial results. Infact, their very viability has become a
question mark. Now they have taken the route of reverse merger with IDBI bank & ICICI
bank thus converting them into the universal banking system.
Major Recommendations by the Narasimham Committee on Banking
Sector Reforms
Strengthening Banking System
Capital adequacy requirements should take into account market risks in addition
to the credit risks.
In the next three years the entire portfolio of government securities should be
marked to market and the schedule for the same announced at the earliest (since
announced in the monetary and credit policy for the first half of 1998-99);
government and other approved securities which are now subject to a zero risk
weight, should have a 5 per cent weight for market risk.
Risk weight on a government guaranteed advance should be the same as for other
advances. This should be made prospective from the time the new prescription isput in place.
Foreign exchange open credit limit risks should be integrated into the calculation
of risk weighted assets and should carry a 100 per cent risk weight.
Minimum capital to risk assets ratio (CRAR) be increased from the existing 8 per
cent to 10 per cent; an intermediate minimum target of 9 per cent be achieved by
INSTITUTE OF MANAGEMENT STUDIES - GHAZIABAD10
8/8/2019 Cbm Project-2
11/40
Performance Appraisal of Banks through Camel framework..
2000 and the ratio of 10 per cent by 2002; RBI to be empowered to raise this
further for individual banks if the risk profile warrants such an increase.
Individual banks' shortfalls in the CRAR are treated on the same line as adopted
for reserve requirements, viz. uniformity across weak and strong banks. There
should be penal provisions for banks that do not maintain CRAR.
Public Sector Banks in a position to access the capital market at home or abroad
be encouraged, as subscription to bank capital funds cannot be regarded as a
priority claim on budgetary resources.
Asset Quality
An asset is classified as doubtful if it is in the substandard category for 18 months
in the first instance and eventually for 12 months and loss if it has been identified
but not written off. These norms should be regarded as the minimum and brought
into force in a phased manner.
For evaluating the quality of assets portfolio, advances covered by Government
guarantees, which have turned sticky, be treated as NPAs. Exclusion of such
advances should be separately shown to facilitate fuller disclosure and greater
transparency of operations.
For banks with a high NPA portfolio, two alternative approaches could be
adopted. One approach can be that, all loan assets in the doubtful and loss
categories should be identified and their realisable value determined. These assets
could be transferred to an Assets Reconstruction Company (ARC) which would
issue NPA Swap Bonds.
An alternative approach could be to enable the banks in difficulty to issue bonds
which could from part of Tier II capital, backed by government guarantee to make
these instruments eligible for SLR investment by banks and approved instruments
by LIC, GIC and Provident Funds.
The interest subsidy element in credit for the priority sector should be totally
eliminated and interest rate on loans under Rs. 2 lakhs should be deregulated for
11
8/8/2019 Cbm Project-2
12/40
scheduled commercial banks as has been done in the case of Regional Rural
Banks and cooperative credit institutions.
Prudential Norms and Disclosure Requirements
In India, income stops accruing when interest or installment of principal is not
paid within 180 days, which should be reduced to 90 days in a phased manner by
2002.
Introduction of a general provision of 1 per cent on standard assets in a phased
manner be considered by RBI.
As an incentive to make specific provisions, they may be made tax deductible.
Systems and Methods in Banks
There should be an independent loan review mechanism especially for large
borrowal accounts and systems to identify potential NPAs. Banks may evolve a
filtering mechanism by stipulating in-house prudential limits beyond which
exposures on single/group borrowers are taken keeping in view their risk profile
as revealed through credit rating and other relevant factors.
Banks and FIs should have a system of recruiting skilled manpower from the open
market.
Public sector banks should be given flexibility to determined managerial
remuneration levels taking into account market trends.
There may be need to redefine the scope of external vigilance and investigation
agencies with regard to banking business.
There is need to develop information and control system in several areas likebetter tracking of spreads, costs and NPSs for higher profitability, , accurate and
timely information for strategic decision to Identify and promote profitable
products and customers, risk and asset-liability management; and efficient
treasury management.
INSTITUTE OF MANAGEMENT STUDIES - GHAZIABAD12
8/8/2019 Cbm Project-2
13/40
Performance Appraisal of Banks through Camel framework..
Structural Issues
With the conversion of activities between banks and DFIs, the DFIs should, over a
period of time convert them to bank. A DFI which converts to bank be given time
to face in reserve equipment in respect of its liability to bring it on par with
requirement relating to commercial bank.
Mergers of Public Sector Banks should emanate from the management of the
banks with the Government as the common shareholder playing a supportive role.
Merger should not be seen as a means of bailing out weak banks. Mergers
between strong banks/FIs would make for greater economic and commercial
sense.
Weak Banks' may be nurtured into healthy units by slowing down on expansion,
eschewing high cost funds/borrowings etc.
The minimum share of holding by Government/Reserve Bank in the equity of the
nationalised banks and the State Bank should be brought down to 33%. The RBI
regulator of the monetary system should not be also the owner of a bank in view
of the potential for possible conflict of interest.
There is a need for a reform of the deposit insurance scheme based on CAMELs
ratings awarded by RBI to banks.
Inter-bank call and notice money market and inter-bank term money market
should be strictly restricted to banks; only exception to be made is primary
dealers.
Non-bank parties are provided free access to bill rediscounts, CPs, CDs, Treasury
Bills, and MMMF.
RBI should totally withdraw from the primary market in 91 days Treasury Bills.
13
8/8/2019 Cbm Project-2
14/40
BASEL II ACCORD
Bank capital framework sponsored by the world's central banks designed to promote
uniformity, make regulatory capital more risk sensitive, and promote enhanced risk
management among large, internationally active banking organizations. The International
Capital Accord, as it is called, will be fully effective by January 2008 for banks active in
international markets. Other banks can choose to "opt in," or they can continue to follow
the minimum capital guidelines in the original Basel Accord, finalized in 1988. The
revised accord (Basel II) completely overhauls the 1988 Basel Accord and is based on
three mutually supporting concepts, or "pillars," of capital adequacy. The first of these
pillars is an explicitly defined regulatory capital requirement, a minimum capital-to-asset
ratio equal to at least 8% of risk-weighted assets. Second, bank supervisory agencies,
such as the Comptroller of the Currency, have authority to adjust capital levels for
individual banks above the 8% minimum when necessary. The third supporting pillar
calls upon market discipline to supplement reviews by banking agencies.
Basel II is the second of the Basel Accords, which are recommendations on banking laws
and regulations issued by the Basel Committee on Banking Supervision. The purpose of
Basel II, which was initially published in June 2004, is to create an international standard
that banking regulators can use when creating regulations about how much capital banks
need to put aside to guard against the types of financial and operational risks banks face.
Advocates of Basel II believe that such an international standard can help protect the
international financial system from the types of problems that might arise should a major
bank or a series of banks collapse. In practice, Basel II attempts to accomplish this by
setting up rigorous risk and capital management requirements designed to ensure that a
bank holds capital reserves appropriate to the risk the bank exposes itself to through its
lending and investment practices. Generally speaking, these rules mean that the greaterrisk to which the bank is exposed, the greater the amount of capital the bank needs to
hold to safeguard its solvencyand overall economic stability.
The final version aims at:
INSTITUTE OF MANAGEMENT STUDIES - GHAZIABAD14
http://www.answers.com/topic/basel-accordhttp://www.answers.com/topic/basel-accordhttp://www.answers.com/topic/basel-committee-on-banking-supervisionhttp://www.answers.com/topic/basel-committee-on-banking-supervisionhttp://www.answers.com/topic/solvencyhttp://www.answers.com/topic/solvencyhttp://www.answers.com/topic/basel-accordhttp://www.answers.com/topic/basel-committee-on-banking-supervisionhttp://www.answers.com/topic/solvency8/8/2019 Cbm Project-2
15/40
Performance Appraisal of Banks through Camel framework..
1. Ensuring that capital allocation is more risk sensitive;
2. Separating operational riskfrom credit risk, and quantifying both;
3. Attempting to align economic and regulatory capital more closely to reduce the
scope forregulatory arbitrage.
While the final accord has largely addressed the regulatory arbitrage issue, there are still
areas where regulatory capital requirements will diverge from the economic.
Basel II has largely left unchanged the question of how to actually definebank capital,
which diverges from accounting equity in important respects. The Basel I definition, as
modified up to the present, remains in place.
The Accord in operation
B
asel II uses a "three pillars" concept (1) minimum capital requirements (addressing
15
http://www.answers.com/topic/capital-requirementhttp://www.answers.com/topic/operational-riskhttp://www.answers.com/topic/operational-riskhttp://www.answers.com/topic/credit-riskhttp://www.answers.com/topic/arbitragehttp://www.answers.com/topic/arbitragehttp://www.answers.com/topic/capital-requirementhttp://www.answers.com/topic/capital-requirementhttp://www.answers.com/topic/accountancy-1http://www.answers.com/topic/capital-requirementhttp://www.answers.com/topic/operational-riskhttp://www.answers.com/topic/credit-riskhttp://www.answers.com/topic/arbitragehttp://www.answers.com/topic/capital-requirementhttp://www.answers.com/topic/accountancy-18/8/2019 Cbm Project-2
16/40
risk), (2) supervisory review and (3) market discipline to promote greater stability in
the financial system.
The Basel Iaccord dealt with only parts of each of these pillars. For example: with
respect to the first Basel II pillar, only one risk, credit risk, was dealt with in a simplemanner while market risk was an afterthought; operational risk was not dealt with at all.
The First Pillar
The first pillar deals with maintenance of regulatory capital calculated for three major
components of risk that a bank faces:credit risk, operational riskand market risk. Other
risks are not considered fully quantifiable at this stage.
The credit riskcomponent can be calculated in three different ways of varying degree of
sophistication, namely standardized approach,Foundation IRBandAdvanced IRB. IRB
stands for "Internal Rating-Based Approach".
Foroperational risk, there are three different approaches -basic indicator approach or
BIA, standardized approachor TSA, and advanced measurement approachor AMA.
Formarket riskthe preferred approach is VaR (value at risk).
As the Basel 2 recommendations are phased in by the banking industry it will move from
standardised requirements to more refined and specific requirements that have been
developed for each risk category by each individual bank. The upside for banks that do
develop their own bespoke risk measurement systems is that they will be rewarded with
potentially lower risk capital requirements. In future there will be closer links between
the concepts of economic profit and regulatory capital.
Credit Risk can be calculated by using one of three approaches
1. Standardized Approach
2. Foundation IRB (Internal Ratings Based) Approach
3. Advanced IRB Approach
The standardized approach sets out specific risk weights for certain types of credit risk.
The standard risk weight categories are used under Basel 1 and are 0% for short term
government bonds, 20% for exposures to OECD Banks, 50% for residential mortgages
INSTITUTE OF MANAGEMENT STUDIES - GHAZIABAD16
http://www.answers.com/topic/market-discipline-1http://www.answers.com/topic/basel-ihttp://www.answers.com/topic/basel-ihttp://www.answers.com/topic/credit-riskhttp://www.answers.com/topic/credit-riskhttp://www.answers.com/topic/operational-riskhttp://www.answers.com/topic/market-riskhttp://www.answers.com/topic/credit-riskhttp://www.answers.com/topic/standardized-approachhttp://www.answers.com/topic/foundation-irbhttp://www.answers.com/topic/foundation-irbhttp://www.answers.com/topic/foundation-irbhttp://www.answers.com/topic/advanced-irbhttp://www.answers.com/topic/advanced-irbhttp://www.answers.com/topic/advanced-irbhttp://www.answers.com/topic/operational-riskhttp://www.answers.com/topic/basic-indicator-approachhttp://www.answers.com/topic/basic-indicator-approachhttp://www.answers.com/topic/standardized-approachhttp://www.answers.com/topic/standardized-approachhttp://www.answers.com/topic/advanced-measurement-approachhttp://www.answers.com/topic/advanced-measurement-approachhttp://www.answers.com/topic/market-riskhttp://www.answers.com/topic/value-at-riskhttp://www.answers.com/topic/market-discipline-1http://www.answers.com/topic/basel-ihttp://www.answers.com/topic/credit-riskhttp://www.answers.com/topic/operational-riskhttp://www.answers.com/topic/market-riskhttp://www.answers.com/topic/credit-riskhttp://www.answers.com/topic/standardized-approachhttp://www.answers.com/topic/foundation-irbhttp://www.answers.com/topic/advanced-irbhttp://www.answers.com/topic/operational-riskhttp://www.answers.com/topic/basic-indicator-approachhttp://www.answers.com/topic/standardized-approachhttp://www.answers.com/topic/advanced-measurement-approachhttp://www.answers.com/topic/market-riskhttp://www.answers.com/topic/value-at-risk8/8/2019 Cbm Project-2
17/40
Performance Appraisal of Banks through Camel framework..
and 100% weighting on commercial loans. A new 150% rating comes in for borrowers
with poor credit ratings. The minimum capital requirement( the percentage of risk
weighted assets to be held as capital) remains at 8%.
For those Banks that decide to adopt the standardized ratings approach they will beforced to rely on the ratings generated by external agencies. Certain Banks are developing
the IRB approach as a result.
The Second Pillar
The second pillar deals with the regulatory response to the first pillar, giving regulators
much improved 'tools' over those available to them under Basel I. It also provides a
framework for dealing with all the other risks a bank may face, such assystemic risk,
pension risk,concentration risk, strategic risk, reputation risk, liquidity riskand legalrisk, which the accord combines under the title of residual risk. It gives banks a power to
review their risk management system.
The Third Pillar
The third pillar greatly increases thedisclosures that the bank must make. This is
designed to allow the market to have a better picture of the overall risk position of the
bank and to allow the counterpartiesof the bank to price and deal appropriately.
The new Basel Accord has its foundation on three mutually reinforcing pillars that allow
banks and bank supervisors to evaluate properly the various risks that banks face and
realign regulatory capital more closely with underlying risks. The first pillar is
compatible with the credit risk, market risk and operational risk. The regulatory capital
will be focused on these three risks. The second pillar gives the bank responsibility to
exercise the best ways to manage the risk specific to that bank. Concurrently, it also casts
responsibility on the supervisors to review and validate banks risk measurement models.
The third pillar on market discipline is used to leverage the influence that other marketplayers can bring. This is aimed at improving the transparency in banks and improves
reporting.
17
http://www.answers.com/topic/bank-regulationhttp://www.answers.com/topic/systematic-riskhttp://www.answers.com/topic/systematic-riskhttp://www.answers.com/topic/concentration-riskhttp://www.answers.com/topic/concentration-riskhttp://www.answers.com/topic/liquidity-riskhttp://www.answers.com/topic/legal-riskhttp://www.answers.com/topic/legal-riskhttp://www.answers.com/topic/disclosure-disambiguationhttp://www.answers.com/topic/disclosure-disambiguationhttp://www.answers.com/topic/markethttp://www.answers.com/topic/counterpartyhttp://www.answers.com/topic/counterpartyhttp://www.answers.com/topic/bank-regulationhttp://www.answers.com/topic/systematic-riskhttp://www.answers.com/topic/concentration-riskhttp://www.answers.com/topic/liquidity-riskhttp://www.answers.com/topic/legal-riskhttp://www.answers.com/topic/legal-riskhttp://www.answers.com/topic/disclosure-disambiguationhttp://www.answers.com/topic/markethttp://www.answers.com/topic/counterparty8/8/2019 Cbm Project-2
18/40
The CAMELS FRAMEWORK
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 itscompliance 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. (Note that the bulk of the academic literature is based on pre-
1997 data and is thus based on CAMEL ratings.) 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) was 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
INSTITUTE OF MANAGEMENT STUDIES - GHAZIABAD18
8/8/2019 Cbm Project-2
19/40
Performance Appraisal of Banks through Camel framework..
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. Padmanabhan
to 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 CAMEL 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 CAMEL rating model.
All exam materials are highly confidential, including the CAMEL. A bank's CAMEL
rating is directly known only by the bank's senior management and the appropriate
supervisory staff. CAMEL 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.
CAMEL ratings in the supervisory monitoring of banks
Several academic studies have examined whether and to what extent private supervisory
information is useful in the supervisory monitoring of banks. With respect to predicting
bank failure, Barker and Holdsworth (1993) find evidence that CAMEL ratings are
useful, even after controlling for a wide range of publicly available information about the
condition and performance of banks. Cole and Gunther (1998) examine a similar question
and find that although CAMEL ratings contain useful information, it decays quickly. For
the period between 1988 and 1992, they find that a statistical model using publicly
available financial data is a better indicator of bank failure than CAMEL ratings that are
more than two quarters old.
Hirtle and Lopez (1999) examine the usefulness of past CAMEL ratings in assessing
banks' current conditions. They find that, conditional on current public information, the
private supervisory information contained in past CAMEL ratings provides further
19
8/8/2019 Cbm Project-2
20/40
insight into bank current conditions, as summarized by current CAMEL ratings. The
authors find that, over the period from 1989 to 1995, the private supervisory information
gathered during the last on-site exam remains useful with respect to the current condition
of a bank for up to 6 to 12 quarters (or 1.5 to 3 years). The overall conclusion drawn from
academic studies is that private supervisory information, as summarized by CAMEL
ratings, is clearly useful in the supervisory monitoring of bank conditions.
CAMEL ratings in the public monitoring of banks
Another approach to examining the value of private supervisory information is to
examine its impact on the market prices of bank securities. Market prices are generally
assumed to incorporate all available public information. Thus, if private supervisory
information were found to affect market prices, it must also be of value to the public
monitoring of banks.
Such private information could be especially useful to financial market participants,
given the informational asymmetries in the commercial banking industry. Since banks
fund projects not readily financed in public capital markets, outside monitors should find
it difficult to completely assess banks' financial conditions. In fact, Morgan (1998) finds
that rating agencies disagree more about banks than about other types of firms. As a
result, supervisors with direct access to private bank information could generate
additional information useful to the financial markets, at least by certifying that a bank's
financial condition is accurately reported.
The direct public beneficiaries of private supervisory information, such as that contained
in CAMEL ratings, would be depositors and holders of banks' securities. Small depositors
are protected from possible bank default by FDIC insurance, which probably explains the
finding by Gilbert and Vaughn (1998) that the public announcement of supervisory
enforcement actions, such as prohibitions on paying dividends, did not cause deposit
runoffs or dramatic increases in the rates paid on deposits at the affected banks. However,
uninsured depositors could be expected to respond more strongly to such information.
Jordan, et al., (1999) find that uninsured deposits at banks that are subjects of publicly-
announced enforcement actions, such as cease-and-desist orders, decline during the
quarter after the announcement.
INSTITUTE OF MANAGEMENT STUDIES - GHAZIABAD20
8/8/2019 Cbm Project-2
21/40
Performance Appraisal of Banks through Camel framework..
The holders of commercial bank debt, especially subordinated debt, should have the most
in common with supervisors, since both are more concerned with banks' default
probabilities (i.e., downside risk). As of year-end 1998, bank holding companies (BHCs)
had roughly $120 billion in outstanding subordinated debt. DeYoung, et al., (1998)
examine whether private supervisory information would be useful in pricing the
subordinated debt of large BHCs. The authors use an econometric technique that
estimates the private information component of the CAMEL ratings for the BHCs' lead
banks and regresses it onto subordinated bond prices. They conclude that this aspect of
CAMEL ratings adds significant explanatory power to the regression after controlling for
publicly available financial information and that it appears to be incorporated into bond
prices about six months after an exam. Furthermore, they find that supervisors are more
likely to uncover unfavorable private information, which is consistent with managers'
incentives to publicize positive information while de-emphasizing negative information.
These results indicate that supervisors can generate useful information about banks, even
if those banks already are monitored by private investors and rating agencies.
The market for bank equity, which is about eight times larger than that for bank
subordinated debt, was valued at more than $910 billion at year-end 1998. Thus, the
academic literature on the extent to which private supervisory information affects stock
prices is more extensive. For example, Jordan, et al., (1999) find that the stock market
views the announcement of formal enforcement actions as informative. That is, such
announcements are associated with large negative stock returns for the affected banks.
This result holds especially for banks that had not previously manifested serious
problems.
Focusing specifically on CAMEL ratings, Berger and Davies (1998) use event study
methodology to examine the behavior of BHC stock prices in the eight-week period
following an exam of its lead bank. They conclude that CAMEL downgrades reveal
unfavorable private information about bank conditions to the stock market. This
information may reach the public in several ways, such as through bank financial
statements made after a downgrade. These results suggest that bank management may
reveal favorable private information in advance, while supervisors in effect force the
release of unfavorable information.
21
8/8/2019 Cbm Project-2
22/40
Berger, Davies, and Flannery (1998) extend this analysis by examining whether the
information about BHC conditions gathered by supervisors is different from that used by
the financial markets. They find that assessments by supervisors and rating agencies are
complementary but different from those by the stock market. The authors attribute this
difference to the fact that supervisors and rating agencies, as representatives of
debtholders, are more interested in default probabilities than the stock market, which
focuses on future revenues and profitability. This rationale also could explain the authors'
finding that supervisory assessments are much less accurate than market assessments of
banks' future performances.
Performance Ratios For Camel Framework
Capital adequacy
Capital adequacy provides fortification for the depositors from the potentials shocks of
losses that a bent might incur and promote the stability in banking system. It helps in
absorbing major financial risk like the creditors market risk, foreign exchange risk,
interest rate risk and the risk operates in off balance sheet operations. So, it reflects the
ability of the bank to absorb the unanticipated shocks. Capital adequacy of any financial
institution is instrumental in the formation of risk perception among its stakeholders.
Capital adequacy can be measured through the following ratios: -
a. Capital assets ratio: It can be evaluated by dividing the banks capital which is
contributed by the onus of the bank by its total assets. The higher the capital
assets ratio the higher the quality of the capital employed.
b. Debt-equity ratio: Debt equity ratio can be calculated by dividing the debt
(borrowing and deposits) upon equity (capital plus reserves and surplus). It
indicates the degree of leverage of the bank and measures how much of the bank
business is financed through equity. A higher ratio reflects less protection for the
creditors and depositors of the bank.
INSTITUTE OF MANAGEMENT STUDIES - GHAZIABAD22
8/8/2019 Cbm Project-2
23/40
Performance Appraisal of Banks through Camel framework..
c. Advances to total assets: It reflects the aggressiveness of the bank in lending the
funds. The higher value of this ratio means there are more advances as a portion
of total assets.
d. G-Gecs (Government securities) to total investment: It measures the risk-
taking ability of the bank. Since the government securities are risk-free, the higher
the investment in G-Securities, the lower value the risk involve in the bank
investment.
Assets quality:
The quality of assets is an important parameter to gauge the strength of any banking
institution, as the quality of its assets has a major bearing on the earning ability of that
institution. This reflects the extent of credit-risk and recovering the bank debt. It can
be computed as follows:
a. Net NPA (non-performing assets) to total assets: It is arrived at by dividing the
net NPA by total assets. The lower the better quality of assets.
b. Net NPA to advances: It is computed by dividing by net NPA by advances. The
higher level of investment means lack off-take and that the bank choose other
avenues, such as government securities and other approved securities to park their
funds.
c. Total earning assets to total assets: It indicates the extent of development of
assets invested as against the advances. The higher level of investment means lack
of credit off-take and that the banks choose other avenues, such as government
securities and other approved securities and other approved securities to park their
funds.
d. Total earning assets to total assets: It is calculated by dividing the amount of
total earning assets (advances plus investment) by the amount of total assets. The
higher of its value shows the strength of the earning base of the bank.
Management efficiency
Management efficiency is the most critical element that ensures the survival and growth
of the bank.
23
8/8/2019 Cbm Project-2
24/40
It is measured as follows:
a. Total advances to total deposits: It measures the efficiency of the management
in converting the available deposits into advances. The efficiency is positively
related to the value of the ratio.
b. Business per employee: It measures the quality of the banks employee in
generating business. It is calculated by dividing the total business (total advances
and total deposit) by the total number of employees. The higher value of this ratio
entails higher efficiency in the management.
c. Operating expenses to total income: It is arrived at by dividing operating
expenses to the total income. The higher value of the ratio adversely affects the
measure of the management quality in the bank.
d. Total expenses to total income: It is arrived at by dividing the total expenses by
the total income. The lower value of this ratio is considered better for the
management.
Earnings quality
While the quality earning add profit, losses results in the erosion of the capital base of a
bank. The earnings quality is usually measured as follows:
a. Interest income to total income: It measures the interest income as a percentage
of the total income. The greater value of this ratio implies more earnings of the
bank from lending and larger interest rate risk.
b. Non- interest income to total income: It measures the non-interest income as a
percentage of the total income. The more of it is taken as to lower the chances of
interest rate risk and more diversification in earning sources.
c. Operating profit to total assets: It is arrived at by dividing the operating profit
by total asset. The earning quality of the bank is directly proportional to this ratio.
d. Net interest margin: It is computed by dividing the net interest income to the
total earning assets (advances plus investment). The higher value of this ratio is
taken as one of the indicators of earning quality of the bank.
INSTITUTE OF MANAGEMENT STUDIES - GHAZIABAD24
8/8/2019 Cbm Project-2
25/40
Performance Appraisal of Banks through Camel framework..
Liquidity position
Liquidity is very important for any financial institution. While a bank has to take proper
care about the liquidity risk, high funds invested in high-return portfolio yield high
profitability for the bank. Thus, any bank generates profit on a reasonable level of
liquidity position can be measured as follows:
a. Liquid assets to total deposit: It indicates the banks ability to meet the
customers deposit in a particular year. Liquid assets include cash in hand, balance
with RBI and other banks (both in India and abroad) the higher value of the ratio
implies the better liquidity of the bank
b. Money at call and short notice to deposits: It shows the money at call and short
notice in a particular year as a portion of total assets. The more of this ratio
indicates a comfortable position of liquidity of the bank.
c. Cash to deposits: It measures the cash in hand at the bank in a particular year in
relation to the deposits of the customers. The greater the value of this ratio makes
the bank less stressful on the liquidity front.
d. Balance with RBI to deposit: In banking, the balances of the commercial banks
with central bank are considered as a safe assets and may be converted into cash
with least cost. The more of this proportion implies better liquidity position of the
bank.
25
8/8/2019 Cbm Project-2
26/40
LITERATURE REVIEW
Keshar J. Baral (2005)
The data set published by joint venture banks in their annual reports, and NRB in
its supervision annual reports, this paper examines the financial health of joint
venture banks in the CAMEL framework. The health checks up conducted on the
basis of publicly available financial data concludes that the health of joint venture
banks is better than that of the other commercial banks.
Bousaid and Saucier (2003)
They used Camel ratings on Japanese Banks for the period 1993 to 1999 and
found that CAMEL framework had the capacity to predict and explain the
distress. The study revealed that the major problem of failed Bank was not of the
inefficiency of management, but the below standard capital adequacy and
considerable problems in their assets quality.
Cole and Gunther (1998)
They found that new ( Less than 6 months old ) CAMEL rating more accurately
predicted the Bank financial distress than what the financial ratios can, but that
financial ratios were better predictors than the older ( more than 6 months old)
CAMEL ratings.
INSTITUTE OF MANAGEMENT STUDIES - GHAZIABAD26
8/8/2019 Cbm Project-2
27/40
Performance Appraisal of Banks through Camel framework..
METHODOLOGIES
Research Design: Exploratory research
Sample Unit: In this research three public sector banks and three private sector banks
operating in India have been taken.
SBI
IDBI
PNB
ICICI
HDFC
AXIS
Sample Size: The sample size is of 6 banks
Data Collection: We have used the secondary data published by the reserve bank of
India, the PROWESS database and annual reports.
Tools Used: The study is entirely based on the CAMEL framework. The financial
performance of bank in this framework is concentrated in five components: Capital
adequacy, asset quality, management efficiency, earning quality and liquidity position.
27
8/8/2019 Cbm Project-2
28/40
DATA ANALYSIS
INDICATORS OF CAPITAL ADEQUACY
RATIO YEAR SBI IDBI PNB ICICI HDFC AXI
Capital-assets ratio 2008 0.0009 0.006 0.002 0.003 0.003 0.002009 0.0007 0.004 0.001 0.003 0.002 0.002010 0.0006 0/003 0.001 0.002 0.002 0.00Average 0.002 0.004 0.001 0.003 0.002 0.00
Debt-equity ratio 2008 12.65 1.91 14.46 7.07 9.45 10.62009 14.26 16.64 15.16 6.24 10.40 25.32010 13.75 21.19 15.16 5.70 8.38 9.88Average 13.55 13.25 14.93 6.33 9.41 15.2
Advances-total asset ratio 2008 0.58 0.63 0.60 0.46 0.48 0.54
2009 0.56 0.60 0.63 0.45 0.54 0.552010 0.60 0.59 0.63 0.37 0.57 0.58Average 0.58 0.61 0.62 0.43 0.53 0.56
G-sec- total investment ratio 2008 0.74 0.71 0.82 0.68 0.65 0.60
2009 0.82 0.81 0.86 0.62 0.93 0.61
2010 0.80 0.83 0.85 0.57 0.94 0.61
Average 0.79 0.78 0.84 0.62 0.84 0.61
INSTITUTE OF MANAGEMENT STUDIES - GHAZIABAD28
8/8/2019 Cbm Project-2
29/40
Performance Appraisal of Banks through Camel framework..
Inferences: -
As per Basel 2 Accord every Banks have to maintain a minimum Capital adequacy of12%. The higher the capital in relation to the total assets, the stronger is the Bank. Themajor indicator of capital adequacy is shown in a Table: -During the study period (2008-2010), reveals that Capital assets ratio of IDBI Bank withan average of 0.004 evidenced stronger Capital base than all the other banks. PNB ishaving the lowest Capital base with an average of 0.001.
Axis Bank is having the highest Debt equity ratio with an average of 15.28 it may be dueto their high Deposits from the domestic market & perhaps due to high borrowing fromthe Financial market. It indicates that how much Bank business is financed through Debt& how much through equity. A higher ratio reflects less protection for the creditors &depositors of the Bank. ICICI Bank is having low Debt equity ratio with an average of6.33 because it can be of less deposit & of less borrowing.The advances to total assets ratio indicates the aggressiveness of a Bank in lending. TheAdvances to total assets ratio of PNB Bank is highest with an average of 0.68 The higherValue of the ratio indicates that bankers are having more Advances as a portion of totalAssets.The investment in a Government Securities is considered as a risk free investment which
carries lowest return & reflects the quality of the invested assets. The PNB & HDFCBank is having highest investment in government securities, so its indicate that
29
8/8/2019 Cbm Project-2
30/40
INDICATOR OF ASSET QUALITY
RATIO YEAR SBI IDBI PNB ICICI HDFC AXIS
NNPA-Total Asset 2008 0.01 0.008 0.004 0.007 0.002 0.0022009 0.01 0.005 0.001 0.01 0.003 0.006
2010 0.01 0.004 0.003 0.01 0.002 0.007Average 0.01 0.006 0.003 0.008 0.002 0.005NNPA-Advances 2008 0.02 0.013 0.006 0.02 0.005 0.004
2009 0.02 0.009 0.002 0.02 0.006 0.0112010 0.02 0.008 0.005 0.02 0.005 0.012Average 0.02 0.01 0.004 0.02 0.005 0.009
Total investment-Total Asset 2008 0.26 0.25 0.27 0.23 0.37 0.31
2009 0.29 0.29 0.26 0.21 0.31 0.322010 0.27 0.31 0.26 0.25 0.25 0.31Average 0.27 0.29 0.26 0.23 0.31 0.31
Total Earning Asset- Total
Assets
2008 0.84 0.88 0.87 0.70 0.84 0.68
2009 0.85 0.89 0.88 0.67 0.84 0.902010 0.87 0.91 0.89 0.62 0.81 0.61
Average 0.85 0.89 0.88 0.66 0.83
INSTITUTE OF MANAGEMENT STUDIES - GHAZIABAD30
8/8/2019 Cbm Project-2
31/40
Performance Appraisal of Banks through Camel framework..
Inferences :-
The quality of assets is an important parameter to gauge the strength of bankinginstitution as a quality of its assets has a major bearing on the earning ability of thatinstitution. This reflects the extent of credit-risk and recovering the bank debt.
HDFC Bank is strongly managing its Non- performing assets within the average ratio of0.002 SBI Bank is having highest non- performing assets out of its total assets.
IDBI Bank is achieving an lowest ratio of Advances out of its total advances on a otherhand AXIS Bank is having a largest ratio of Advances. The lower volume of this ratiosignifies the improved quality of advances.Among all the groups of Banks, HDFC & AXIS Bank were the top performers, with anaverage ratio of 0.31 .
INDICATORS OF MANAGEMENT EFFICIENCY
RATIO YEAR SBI IDBI PNB ICICI HDFC AX
Total advance-Total deposit 2008 0.58 0.63 0.60 0.46 0.48 0.52009 0.56 0.60 0.63 0.45 0.54 0.52010 0.60 0.60 0.63 0.37 0.57 0.5Average 0.58 0.61 0.62 0.43 0.53 0.5
Business per employee (incrore)
2008 3.82 17.27 5.90 19.59 5.13 11
2009 4.59 22.89 6.54 14.09 6.53 122010 4.79 29.10 6.35 10.95 5.65 12Average 4.40 23.38 6.25 14.87 5.77 11
Operating expense-TotalIncome 2008 0.25 0.11 0.24 0.27 0.30 0.22009 0.24 0.11 0.22 0.27 0.28 0.22010 0.29 0.12 0.23 0.30 0.29 0.2Average 0.26 0.11 0.23 0.27 0.29 0.2
Total expenses- total income 2008 0.88 0.93 0.87 0.90 0.87 0.8
2009 0.88 0.94 0.86 0.91 0.89 0.8
2010 0.89 0.94 0.84 0.88 0.85 0.8
Average 0.89 0.93 0.86 0.90 0.87 0.8
31
8/8/2019 Cbm Project-2
32/40
INFERENCE:
Total advance to total deposits:- It indicates or measures efficiency of the managementin converting the available deposits into advances. The efficiency is positively related to
the value of the ratio.From last 3 year's 2007-08, 2008-09 and 2009-10, Punjab national bank
showing highest value in total advance to total deposits which is .62 than .61 by IDBIwho is very close to PNB. Hence, this shows efficiency of punjab national bank & IDBIis very high, they are very competent in converting the available deposits into advances.On other hand, ICICI is least effective in converting deposits into advances.
Business per employee:- It measures the quality of the bank's employees in generatingbusiness. It is calculated by dividing the total business(total advances and total deposit)by the total number of employees. The higher value of the ratio entails higher efficiencyin the management.
From Last 3 year's 2007-08, 2008-09 and 2009-10, IDBI has mostefficient management in generating business with highest value with 23.38, than ICICIwith 14.87 & AXIS bank 11.76. On the other hand, SBI management efficiency is leasteffective in generating business with lowest value 4.40.
Operating expenses to Total income: In this the higher the value of the ratio adverselyaffects the measure of the management quality in the bank.
INSTITUTE OF MANAGEMENT STUDIES - GHAZIABAD32
8/8/2019 Cbm Project-2
33/40
Performance Appraisal of Banks through Camel framework..
From Last 3 year's 2007-08, 2008-09 and 2009-10, HDFC and ICICIshowing adverse management quality with highest value's .29 & .27. On the other hand,IDBI with lowest value showing they possess best management quality.
Total expenses to total income: In this the lower the value of the ratio is considered
better for the management.From Last 3 year's 2007-08, 2008-09 and 2009-10, PNB and AXIS bankis better for the management as they have lowest value in total expenses to total incomewhich is .86 in both the cases. ICICI and IDBI has a highest value this shows they havepoor management system which is .93 and .90.
INDICATORS OF EARNINGS QUALITY
RATIO YEAR SBI IDBI PNB ICICI HDFC AX
Interest income-Total income 2008 0.84 0.80 0.88 0.78 0.80 0.302009 0.83 0.87 0.85 0.79 0.81 0.272010 0.82 0.87 0.86 0.78 0.78 0.32Average 0.83 0.85 0.86 0.78 0.80 0.30
Non-interest income-Totalincome
2008 0.16 0.20 0.12 0.22 0.20 0.70
2009 0.17 0.13 0.15 0.21 0.19 0.732010 0.18 0.13 0.14 0.22 0.21 0.68Average 0.17 0.15 0.14 0.22 0.20 0.70
Operating profit-Total assets 2008 0.03 0.11 0.02 0.02 0.03 0.02
2009 0.03 0.11 0.02 0.02 0.03 0.032010 0.03 0.12 0.02 0.02 0.03 0.03
Average 0.02 0.11 0.02 0.02 0.30 0.02Net Interest Margin 2008 0.08 0.07 0.08 0.09 0.09 0.03
2009 0.08 0.07 0.09 0.10 0.10 0.03
2010 0.08 0.07 0.08 0.09 0.09 0.05
Average 0.08 0.07 0.08 0.09 0.09 0.04
33
8/8/2019 Cbm Project-2
34/40
INFERENCE:
In case of ratio of interest income to total income, PNB has the highest interest income inproportion to total income of 0.86. Interest income forms the major part in every bank.There can we seen slight decline in the interest income to total income ratio of SBI, PNB,ICICI and AXIS bank this may be because of now banks are very bullish towardsinvestment in capital market and funds are being invested there too, in order to derivemore income from dividend and market fluctuations.
The non-interest income to total income indicates fee income and less default risk. Onthis parameter AXIS bank has the highest non-interest income in comparison with otherbanks. The government sector banks have the lowest non-interest income in relation toprivate banks. SBI, PNB and IDBI have a ratio of 0.17, 0.15, 0.14 respectively.
The ratio of operating profit to total assets measures the effectiveness of the bank inemploying its working funds to generate profit. On this parameter HDFC bank have beenin the top with a ratio on 0.30 followed by IDBI with 0.11 n then SBI, ICICI, AXIS andPNB have a very low operating profit in relation to there assets.
The net interest margin reflects the ability of the banks to generate income from theirtotal earning assets. In this respect, ICICI and HDFC have a high net interest margin incomparison with SBI and other banks. This is because of the better asset-liabilitymanagement in the private banks. AXIS bank has low margin because of low interestincome.
INSTITUTE OF MANAGEMENT STUDIES - GHAZIABAD34
8/8/2019 Cbm Project-2
35/40
Performance Appraisal of Banks through Camel framework..
INDICATORS OF LIQUIDITY
RATIO YEAR SBI IDBI PNB ICICI HDFC AXI
Liquid asset-Total deposits 2008 0.22 0.21 0.20 0.22 0.27 0.232009 0.22 0.18 0.18 0.22 0.22 0.212010 0.20 0.17 0.17 0.33 0.27 0.17
Average 0.21 0.19 0.19 0.25 0.25 0.20Money at call and shortnotice to Total assets
2008 0.03 0.03 0.02 0.04 0.09 0.06
2009 0.07 0.02 0.02 0.06 0.03 0.052010 0.04 0.004 0.02 0.06 0.09 0.04Average 0.05 0.02 0.02 0.05 0.07 0.05
Cash Total Deposits 2008 0.13 0.12 0.11 0.16 0.15 0.14
2009 0.14 0.10 0.10 0.14 0.12 0.132010 0.12 0.09 0.09 0.19 0.18 0.11Average 0.13 0.10 0.10 0.16 0.15 0.13
Balance with RBI- Totaldeposits
2008 0.10 0.09 0.09 0.06 0.12 0.08
2009 0.07 0.08 0.08 0.08 0.09 0.08
2010 0.08 0.08 0.07 0.14 0.09 0.07Average 0.08 0.08 0.08 0.09 0.10 0.08
35
8/8/2019 Cbm Project-2
36/40
INFERENCE:-
As shown in the above table, for liquid assets- total deposit ratio, HDFC and ICICI hasthe highest liquidity with a average ratio of 0.25, doing relatively well in meeting thecustomer demand. It is further followed by SBI with a ratio of 0.21. IDBI and PNB are on
the same footing with a ratio of 0.19. It is also seen that liquidity has been in decreasingtrend majorly because of the larger demand of bank credit due to accelerated economicactivity.For money at call and short notice to total assets, HDFC has the higher liquidity with aratio of 0.07 in relation to other banks .SBI, ICICI and AXIS is on equal footing inrelation to money at call and short notice in proportion to total assets. The lowest ratio isof IDBI and PNB with 0.02.In case of cash to deposit ratio, ICICI has the highest cash in proportion to deposits.Holding the cash is considered as an idle asset for any institution. Liquidity position is
good but it can lose opportunity cost of return on alternative assets that can be easilyconverted into liquid asset.In ratio of bank balance with the RBI to deposits, HDFC holds the highest exposure inproportion to deposit, rest all other banks i.e. SBI, PNB, IDBI and AXIS have the sameratio of 0.08. Balance with RBI is considered as cash-equivalent, so banks having morebalance with RBI are better in relation to liquidity.
INSTITUTE OF MANAGEMENT STUDIES - GHAZIABAD36
8/8/2019 Cbm Project-2
37/40
Performance Appraisal of Banks through Camel framework..
CONCLUSION AND FINDINGS
Capital adequacy:
The capital adequacy ratio of all the six banks is above the minimum requirements and
above the industry average.
Assets:
NPA of HDFC and SBI bank have been almost at same level during 2008-2010. There
has been considerably decline in the NPAs of ICICI, IDBI and PNB, but AXIS banks
NPAs have increased.
Management:
Professional approach that has been adopted by the banks in the recent past is in right
direction & also it is the right decision. Business per employee has seen a drastic increase
on year-to-year basis for all the six banks.
Earnings:
Income from interest is quite high for every bank except AXIS bank which has more non-
interest income. Overall earning of the banks have been a good level as there interest
margins are quite good.
Liquidity:
Banks should maintain quality securities with good liquidity to meet contingencies.
HDFC and ICICI Bank is fulfilling this requirement by maintaining highest liquid asset-
to deposit ratio. Cash and deposits with bank are also indicating strong liquidity position
of the banks.
37
8/8/2019 Cbm Project-2
38/40
RECOMMENDATIONS
1) The banks should adapt themselves quickly to the changing norms.
2) The system is getting internationally standardized with the coming of BASELL IIaccords so the Indian banks should strengthen internal processes so as to cope with the
standards.
3) The banks should maintain a 0% NPA by always lending and investing or creating
quality assets which earn returns by way of interest and profits.
4) The banks should find more avenues to hedge risks as the market is very sensitive to risk
of any type.
5) Have good appraisal skills, system, and proper follow up to ensure that banks are above
the risk.
INSTITUTE OF MANAGEMENT STUDIES - GHAZIABAD38
8/8/2019 Cbm Project-2
39/40
Performance Appraisal of Banks through Camel framework..
Bibliography
Books:
Kothari, C.R., Research Methodology: Methods and Techniques, Wishwa
Publication, Delhi
Ved Pal and Praveen Chauhan,(2009) by NICE Journal of Business, (Vol. 4)
Websites Reference:
http://www.stock-picks-focus.com/hdfc-bank.html
http://www.stock-picks-focus.com/axis-bank.html
http://www.stock-picks-focus.com/icici-bank.html
http://www.basel2implementation.com/pillars.htm
http://www.icicibank.com
http://www.hdfcbank.com
http://www.axisbank.com
http://www.allbankingsolutions.com/camels.htm
http://www.shkfd.com.hk/glossary/eng/RA.htm
"http://www.wikinvest.com/wiki/CAPITAL_ADEQUACY_RATIO "
http://www.answers.com/topic/basel-ii
39
http://www.stock-picks-focus.com/hdfc-bank.htmlhttp://www.stock-picks-focus.com/axis-bank.htmlhttp://www.stock-picks-focus.com/icici-bank.htmlhttp://www.basel2implementation.com/pillars.htmhttp://www.hdfcbank.com/http://www.hdfcbank.com/http://www.axisbank.com/http://www.axisbank.com/http://www.allbankingsolutions.com/camels.htmhttp://www.shkfd.com.hk/glossary/eng/RA.htmhttp://www.wikinvest.com/wiki/CAPITAL_ADEQUACY_RATIOhttp://www.stock-picks-focus.com/hdfc-bank.htmlhttp://www.stock-picks-focus.com/axis-bank.htmlhttp://www.stock-picks-focus.com/icici-bank.htmlhttp://www.basel2implementation.com/pillars.htmhttp://www.hdfcbank.com/http://www.axisbank.com/http://www.allbankingsolutions.com/camels.htmhttp://www.shkfd.com.hk/glossary/eng/RA.htmhttp://www.wikinvest.com/wiki/CAPITAL_ADEQUACY_RATIO8/8/2019 Cbm Project-2
40/40