CAMEL analysis done on 5 public banks by M.v.v.Raghuram PGDM.

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CAMELS MODEL ANALYSIS
OF
TOP 5 PUBLIC SECTOR BANKS IN INDIA.
DR T.DURGA PRASAD
(Guide to the project)
Associate professor
Aditya Global Business School
Surampalem, Kakinada.
M.V.V.RAGHURAM
PGDM –II Year student
Aditya Global Business School
Surampalem ,Kakinada.
ABSTRACT
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.
In the present study, an attempt has
been made to rank the various
commercial banks operating in
India. The banks in India have been
categorized into Public sector,
Private sector, and Foreign banks.
The sample of selected banks
consists of top 5 Public Sector
banks. For the purpose of ranking,
CAMELS model approach has been
applied and incorparted.The
important parameters like Capital
Adequacy, Assets Quality,
Management Efficiency, Earnings
Quality and Liquidity. The finding
of the study shows that public sector
banks, viz. SBI,Bank of Borada
,PNB, Canara Bank and Indian bank
has been ranked at the top five
positions in their financial
performance during the study
period.

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INTRODUCTION :
CAMEL model of rating was first developed in the 1970s by the three federal banking
supervisors of the U.S (the Federal Reserve, the FDIC and the OCC) as part of the
regulators’ “Uniform Financial Institutions Rating System”, to provide a convenient
summary of bank condition at the time of its on-site examination. The banks were judged
on five different components under the acronym C-A-M-E-L:
C – Capital
Adequacy
A – Asset Quality
M – Management Soundness
E – Earnings Capacity and
L – Liquidity
The banks received a score of ‘1’ through ‘5’ for each component of CAMEL and a final
CAMEL rating representing the composite total of the component CAMEL scores as a
measure of the bank’s overall condition. The system of CAMEL was revised in 1996,
when agencies added an additional parameter ‘S’ for assessing “sensitivity to market risk”,
thus making it ‘CAMELS’ that is in vogue today.
Based on the recommendations of the Padmanbhan Committee, the commercial banks
incorporated in India are presently rated on the ‘CAMELS’ model (Capital adequacy, Asset
quality, Management, Earnings, Liquidity, and Systems & control), while foreign banks’
branches operating in India are rated under the ‘CALCS’ model (Capital adequacy, Asset
quality, Liquidity, Compliance, and Systems & control). As mentioned above, the
Committee had originally recommended a CACS model, which was subsequently modified
to also include Liquidity (L) as an additional parameter. Further modifications, in the form
comprising additional granularities in the rating scale of parameters under CAMELS have
since been introduced by RBI.

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CAMELS FRAMEWORK
CAPITAL ADEQUACY - C
Capital base of financial institutions facilitates depositors in forming their risk perception
about the institutions. Also, it is the key parameter for financial managers to maintain
adequate levels of capitalization. Moreover, besides absorbing unanticipated shocks, it
signals that the institution will continue to honour its obligations. The most widely used
indicator of capital adequacy is capital to risk- weighted assets ratio (CRWA).
The following ratios measure capital adequacy:
Capital Risk Adequacy Ratio:
CRAR is a ratio of Capital Fund to Risk Weighted Assets. Reserve Bank of India
prescribes banks to maintain a minimum Capital to risk-weighted Assets Ratio (CRAR) of
9 % with regard to credit risk, market risk and operational risk on an on- going basis, as
against 8 % prescribed in Basel documents.
Total capital includes Tier-I capital and Tier-II capital. Tier-I capital includes paid up equity
capital, free reserves, intangible assets etc. Tier-II capital includes long term unsecured
loans, loss reserves, hybrid debt capital instruments etc. The higher the CRAR, the stronger
is considered a bank, as it ensures high safety against bankruptcy.
CRAR = Capital/ Total Risk Weighted Credit Exposure.
ASSET QUALITY – A
Asset quality determines the healthiness of financial institutions against loss of value in the
assets. The weakening value of assets, being prime source of banking problems, directly
pour into other areas, as losses are eventually written-off against capital, which ultimately
expose the earning capacity of the institution.
EARNINGS & PROFITABILITY – E
Earnings and profitability, the prime source of increase in capital base, is examined with
regards to interest rate policies and adequacy of provisioning. In addition, it also helps to
support present and future operations of the institutions. The single best indicator used to
gauge earning is the Return on Assets (ROA), which is net income after taxes to total asset
ratio.

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1. Return on Asset:
Net profit to total asset indicates the efficiency of the banks in utilizing their assets in
generating profits. A higher ratio indicates the better income generating capacity of the
assets and better efficiency of management.
MANAGEMENT – M
Sound management is one of the most important factors behind financial institutions’
performance. Indicators of quality of management, however, are primarily applicable to
individual institutions, and cannot be easily aggregated across the sector.
LIQUIDITY – 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.
It is, therefore, generally assessed in terms of overall assets and liability management, as
mismatching gives rise to liquidity risk. Efficient fund management refers to a situation
where a spread between rate sensitive assets (RSA) and rate sensitive liabilities (RSL) is
maintained.
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.
SENSITIVITY TO MARKET RISK – S
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

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Banks profitability to remain low: CRISIL
We expect fiscal 2018 to be another year of weak profitability due to higher NPAs ;continued
high level of provisioning; and continuous interest rate cuts over the last few quarters, which
has impacted the yield. Provisions, as a proportion of total assets, though lower from the
previous fiscal will still remain at high levels because of continued high level of slippages
and fresh provisioning. As a result, of the 21 PSBs, we expect some of them to still post
losses or very low profits. We expect provision and slippages for PSBs to be lower in fiscal
2018 from the previous fiscal and hence, its return on assets (ROAs) will improve to 0.04%
and turn positive from a negative ROA level in the previous fiscal. PSBs' ROA is further
expected to improve to0.2% in fiscal 2019.
Overall, ROA of the banking industry is also expected to improve 5-10 bps each over the two
fiscals from 0.3% in fiscal 2017. Hence, we expect the overall ROA of the banking industry
to reach ~0.5% level by the end of fiscal 2019. The marginal improvement in the ROA level
of overall banking industry is majorly because of PSBs' improved profitability over the next
two fiscals.
.

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Table 1: CAMEL rating for 5 public sector banks.
Capital Adequacy Banks 2017 2016 2015 2014 2013 Average Rank
SBI 13 13 12 13 13 12.75 2
Bank of
borada 13 13 13 12 13 12.8 3
PNB 12 11 13 12 13 12.2 4
Indian bank 14 13 13 13 13 13.2 1
Canara bank 13 11 11 11 12 11.6 5
Asset quality Banks 2017 2016 2015 2014 2013 Average Rank
SBI 0.33 0.42 0.4 0.34 0.36 0.37 3
Bank of
borada 0.42 0.41 0.39 0.33 0.36 0.38 4
PNB 0.28 0.21 0.27 0.24 0.27 0.25 1
Indian bank 0.32 0.62 0.7 0.56 0.68 0.58 5
Canara bank 0.28 0.35 0.29 0.35 0.36 0.33 2
Management
quality Banks 2017 2016 2015 2014 2013 Average Rank
SBI 0.022 0.025 0.038 0.389 0.53 0.246 1
Bank of
borada 0.198 0.174 0.227 0.199 0.341 0.228 2
PNB 0.023
-
0.0522 0.048 0.052 0.086 0.0314 5
Indian bank 0.075 0.077 0.114 0.103 0.178 0.109 3
Canara bank 0.02 -0.067 0.063 0.058 0.09 0.033 4
Earnings Ability Banks 2017 2016 2015 2014 2013 Average Rank
SBI 0.0038 0.0044 0.0063 0.006 0.009 0.0059 2
Bank of
borada 0.0019 -0.008 0.0047 0.0068 0.0081 0.0027 4
PNB 0.0018
-
0.0059 0.005 0.0061 0.0099 0.0034 3
Indian bank 0.0064 0.0034 0.0052 0.0061 0.0097 0.0062 1
Canara bank 0.0019 -0.005 0.004 0.004 0.006 0.0022 5
Liquidty Ability Banks 2017 2016 2015 2014 2013 Average Rank
SBI 0.75 0.76 0.76 0.77 0.76 0.76 5
Bank of
borada 0.86 0.85 0.86 0.86 0.86 0.86 2
PNB 0.86 0.82 0.83 0.82 0.81 0.83 4
Indian bank 0.83 0.87 0.87 0.86 0.87 0.86 1
Canara bank 0.84 0.086 0.86 0.85 0.86 0.85 3

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Table 2 : Composite ranking of Public Sector banks using CAMEL model
Bank C A M E L Average Rank
SBI 12.75 0.37 0.246 0.0059 0.76 2.82638 3
Bank of
borada
12.8 0.38 0.228 0.0027 0.86 2.85414 2
PNB 12.2 0.25 0.0314 0.0034 0.83 2.66296 4
Indian
bank
13.2 0.58 0.109 0.0062 0.86 2.95104 1
Canara
bank
11.6 0.33 0.033 0.0022 0.85 2.56304 5
FINDINGS OF THE STUDY :
❖ The higher capital adequacy which represents the banks are safer from
becoming insolvent ,vice versa .
❖ Asset quality which represents the portion of provisions to the
company with its total amount of loan.
❖ Management quality represents the money generated as a return with
money invested by share holders.
Bank Adequacy ratio
Indian bank(Highest Rank) 13.2
Canara bank(Least Rank) 11.6
Bank Asset quality ratio
PNB(Highest Rank) 0.25
Indian bank(Least Rank) 0.58
Bank Management quality ratio
SBI(Highest Rank ) 0.246
PNB(Least Rank ) 0.0314

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❖ Earnings ability measures bank profitability with respect to its total
assets.
❖ Liquidity ability shows the total deposits in proportion to the total
assests.
❖ The composite CAMEL rating shows that Indian bank is the best
ranking bank and Canara bank is the least ranking bank for the five
year period from 2013 to 2017.
REFERENCES :
• Kaur, H.V. (2010), Analysis of Banks in India- A CAMEL Approach, Global Business
Review, 11, pp.257- 280.(Theoretical framework)
• Mishra, S.K. (2012), Analyzing Soundness in Indian Banking: A
CAMEL Approach. Research Journal of Management Sciences, 1(3), 9-
14.
• www.Monetarycontrol.com(Top 5 pubic sector banks –financials for
ratios)
• www.CRISIL.com(For analyzing performance of public sector banks
for upcoming years.)
• Imported ratios from MS excel document for ratios calculations using
financial data from respective banks balance sheet and profit &loss
account.
• www.Google.com
Bank Earning ability ratio
Indian bank(Highest Rank) 0.0062
Canara bank (Least Rank ) 0.0022
Bank Earning ability ratio
Indian bank (Highest Rank) 0.86
SBI(Least Rank ) 0.76