Financial ratios involved in CAMELS framework

1. Capital Adequacy
Capital Adequacy Ratio (CAR):
• It is the ratio of a bank’s capital in relation to its risk
weighted assets and current liabilities.
• It is decided by central banks and bank regulators to
prevent commercial banks from taking excess leverage and
becoming insolvent in the process.
= (Tier I + Tier II + Tier III (Capital funds)) /Risk weighted
assets
• The higher the CAR, the stronger the bank.

2. 1. Tier I Capital: Actual contributed equity plus retained
earnings.
2. Tier II Capital: Preferred shares plus 50% of subordinated
debt.
3. Tier 3 capital: Debts may include a greater number of
subordinated issues, undisclosed reserves and general loss
reserve
4. Risk Weighted Assets (RWA) comes from the Basel Norms for
regulating Bank's capital requirement for managing credit risk.
The riskiness also varies on the basis of type of loan. So these
assets are given different weightage based on there riskiness to
arrive at Risk Weigtage Assets

3. Debt equity ratio:
It indicates how much of the bank business is financed through debt and how
much through equity.
• Debt – Equity ratio = Borrowings_______ X 100
Share capital + Reserves
Higher ratio indicates less protection for the creditors and depositors in the
banking system.

4. • Advances to assets:
This ratio indicates a bank’s aggressiveness in lending which
ultimately results in better profitability. Total advances also
include receivables.
=Total Advances/Total Asset
The higher the ratio indicates aggressiveness of bank in lending
advances .

5. • Government Securities to Total Investments
• The risk held in the investments of banks is reflected by this ratio.
• It is assumed that Government securities are most secured and risk
free debt instruments .
= Government Securities / Total Investments
• It means higher the investment in government securities will result in
lower risk and vice versa

6. • Coverage ratio
The Coverage ratio measures the availability of capital to meet risk of loss
asset.
= Total Assets/ Total Debt
As a rule of thumb, utilities should have an asset coverage ratio of at least
1.5,

7. Assets Quality
• Gross NPAs to Gross Advances ratio (%):
Gross NPAs X 100
Gross Advances
• Net NPA to Total Assets (%):
Gross NPAs- Provisions X 100
Total Assets
• Total Investments to Total Asset
• Standard Advances to Total Advance

8. Management Efficiency
Business Per Employee :This tool measures the efficiency of all the
employees of a bank in generating Business for the bank.
Sum of total deposits and total advances X 100
No. of employees
Profit per Employee: This ratio measures the efficiency of employees at the
branch level
Net profit X 100
No. of employees

9. • Credit (Advances) Deposit Ratio:
• The ratio measures the efficiency of management in converting the deposits
available with the bank (excluding other funds like equity capital, etc.) into high
Earning advances.
• Total deposits include demand deposits, savings deposits; term Deposits and
deposits of other banks. Total advances also include the receivables.
• Return On Net Worth (%) = Net Income / Shareholders’ Equity

10. EARNING QUALITY
• Return On Assets:
• NIM to Total Assets (%) : A higher spread indicates the better
earnings given the total assets. Interest income includes dividend
income and interest expended included interest paid on deposits, loan
from the RBI, and other short-term and long term loans
• Operating Profit to Total Assets:
• Interest Income to Total Income :

11. LIQUIDITY
• Liquid Assets to total Assets (%)
• Government securities to Total Assets (%)
• Liquid Assets to Total Deposits (%)
• Liquid Assets to Demand Deposits (%): It measures the balance at
banks and RBI. Balance at Bank includes cash in hand (including
foreign currency notes) balance with RBI include current account,
other account. The Total assets include the revaluation of all the
assets