It is Rating system, rates on a scale of one to five, with one being the highest and five being the lowest

1. CHAPTER 06
STUDY OF BANK
FINANCIAL STATEMENT
• Balance sheet & Profit
and loss account
• CAMELS framework

3. CAMELS FRAMEWORK
Rating system, is on a scale of one to five, with one being the highest and five
being the lowest
Developed in the United States
Assess a bank’s overall condition
6 factors
Used by top management

4. Capital Adequacy
•Capital Adequacy reflects the overall financial condition of the banks and
also the ability of management to meet the need for additional capital.
•It also indicates whether the bank has enough capital to absorb
unexpected losses.
•Capital Adequacy Ratio acts as an indicator of bank leverage.
The following ratios measure Capital Adequacy:
a) Capital adequacy ratio
b) Debt equity ratio
c) Coverage ratio
d) Advances to assets
e) Government Securities to Total Investments (%)

5. Assets
•The quality of assets is an important parameter to measure the degree of
financial strength.
•The prime motto behind measuring the assets quality is to ascertain the
component of Non-Performing Assets (NPAs) as a percentage of the total
assets.
•This indicates what types of advances the bank has made to generate
interest income.
•Thus, assets quality indicates the type of the debtors the bank is having.
The following ratios are necessary to assess assets quality:
a) Net NPA to Net Advance (%)
b) Net NPA to Total
c) Total Investments to Total Assets
d) Standard Advances to Total Advances

6. Management Capability
Ability of an institution to identify and then react to
financial stress
Business strategy
a) Business Per Employee
b) Profit Per Employee
c) Credit Deposit Ratio
d) Return On Net Worth

7. Earnings:
Earning quality reflects quality of a bank’s profitability and its ability to
earn consistently
a)Return On Assets
b) NIM to Total Assets (%)
c) Operating Profit to Total Assets
d) Interest Income to Total Income

8. Liquidity
For a bank, liquidity is a crucial aspect which represents its ability
to meet its financial obligations.
A high liquidity ratio indicates that the bank is more affluent.
a) Liquid Assets to total Assets (%)
b) Government securities to Total Assets (%)
c) Liquid Assets to Total Deposits (%)
d) Liquid Assets to Demand Deposits (%)

9. Sensitivity
Institution’s sensitivity to market risks

10. HOW DOES THE CAMELS RATING
WORK?
For each category, a score is given from one to five.
One is the highest score and indicates strong performance and
risk management practices within the institution.
On the other hand, five is the lowest rating. It indicates a high
probability of bank failure and the need for immediate action to
ratify the situation.
A higher rating will impede a bank’s ability to expand through
investment, merger, or adding more branches.