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Performance Measurement System in Indian Banking Sector in Camel Framework

CHAPTER SIX

PERFORMANCE MEASUREMENT SYSTEM IN INDIAN BANKING SECTOR IN CAMEL FRAMEWORK
A sound financial system is indispensable for a healthy and vibrant economy. The banking sector constitutes a predominant component of the financial services industry. The performance of any economy to a large extent is dependent on the performance of the banking sector. The banking sector’s performance is seen as the replica of economic activities of the nation as a healthy banking system acts as the bedrock of social, economic and industrial growth of a nation. Banking institutions in our country have been assigned a significant role in financing the process of planned economic growth. During the past six decades since independence, the banking sector has witnessed significant changes and has surely come a long way from the days of nationalisation during early 1970s to the advent of liberalization, privatization and globalization, in the post-991 era. The flurry of reforms witnessed over the last one and half decade has brought about significant changes in the banking arena in the country. Leveraging on their new found tech-savvy and increased thrust on product/service innovation, the banks in the country witnessed a phenomenal growth in the last few years as the economic growth moved up into top gear to be amongst top in the world. The Asian crisis of 1997 and the recent events like the US sub prime crisis have once again underlined the significance of a strong and robust financial sector for smooth and efficient allocation of resources. Indian banks, which initially were in a denial mode about the impact of crisis (on them), but soon admitted to vulnerability to global shocks, have shown remarkable resilience, thanks to the Reserve Bank of India’s timely and prudent measures which saved the domestic banks from the blushes of the worst financial crisis. Life seems to be returning to normal in the global banking sector after it was hard hit by the financial catastrophe, which unravelled in September, 2008, as better than expected results from banks across the globe lend credence to the claims that stimulus efforts are finally yielding results. Against this background, it is important to measure the performance of the banking sector through a performance measurement system that provides an opportunity to assess the performance of Indian banks

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….. Performance Measurement System in Indian Banking Sector in Camel Framework

The present supervisory system in banking sector is a substantial improvement over the earlier system in terms of frequency, coverage and focus as also the tool employed. Majority of the Basel Core Principles for effective banking supervision have already been adhered to and rest is at the stage of implementation. Two supervisory rating models based on CAMELS (Capital Adequacy, Assets Quality, Management, Earning, Liquidity, Systems and Controls) and CACS (Capital Adequacy, Assets Quality, Compliance, Systems and Controls) factors for rating of Indian commercial Banks and Foreign Banks operating in India respectively, have been worked out on the lines recommended by Padmanabhan Working Group (1995). These ratings would enable the RBI to identify the banks whose condition warrants special supervisory attention (Bodla and Verma, 2006). Two decades have elapsed since the initiation of banking sector reforms in India. Over this period, the banking sector has experienced a paradigm shift. Hence, it is high time to make performance appraisal of this sector. Accordingly, a framework for the evaluation of the current strength of the system, and of operations and the performance of the banks has been provided by Reserve Bank’s measuring rod of ‘CAMELS’ which stands for capital adequacy, assets quality, management efficiency, earning quality, liquidity and internal control systems. The main endeavour of CAMEL system is to detect problems before they manifest themselves. The RBI has instituted this mechanism for critical analysis of the balance-sheet of banks by themselves and presentation of such analysis to provide for internal assessment of the health of banks. The analysis, which is made available to the RBI, forms a supplement to the system of off-site monitoring of banks. The prime objective of the CAMEL model of rating banking institutions is to catch up the comparative performance of various banks (Bodla and Verma, 2006). CAMEL is, basically, a ratio-based model for evaluating the performance of banks. It is a model for ranking/rating of the banks. The prime objective of this chapter is to measure the performance of banking sector by dividing banks into public and private sectors as explained earlier. Various ratios forming the model are explained as follows (Joshi and Joshi, 2002):

191

and reserves and surpluses. revaluation reserves. the stronger the bank. Total 192 . Debt-Equity Ratio This ratio indicates the degree of leverage of a bank. Capital Adequacy Ratio acts as an indicator of bank leverage. It is arrived at by dividing the sum of Tier-I. which includes equity capital. It indicates how much of the bank business is financed through debt and how much through equity. This ratio indicates a bank’s aggressiveness in lending which ultimately results in better profitability. Tier-III capital comprises of short-term subordinate debt. Debt-Equity ratio is arrived at by dividing total borrowings and deposits by shareholders’ net worth. CAR= (Tier-I + Tier-II + Tier-III)/RWA Tier-I capital includes equity capital and free reserves. The following ratios measure Capital Adequacy: 1. Tier-II capital comprises of subordinate debt of 5-7 years tenure. the banks in India should have a CAR of 12%. Higher ratio indicates less protection for the creditors and depositors in the banking system. Capital Adequacy reflects the overall financial condition of the banks and also the ability of management to meet the need for additional capital. Capital is seen as a cushion to protect depositors and promote the stability and efficiency of financial system around the world..…. 2. hybrid debt capital instruments and undisclosed reserves and cumulative perpetual preference shares. The higher the CAR. Capital adequacy ratio (CAR) The banks are required to maintain the capital adequacy ratio (CAR) as specified by RBI from time to time. Symbolically. Advances to Assets This is a ratio of the Total Advances to Total Assets. 3. Tier-II and Tier-III capital by aggregate of risk weighted assets (RWA). As per the latest RBI norms. It also indicates whether the bank has enough capital to absorb unexpected losses. It is important for a bank to maintain depositors’ confidence and preventing the bank from going bankrupt. Performance Measurement System in Indian Banking Sector in Camel Framework Capital Adequacy Capital adequacy has emerged as one of the major indicators of the financial health of a banking entity.

does not form part of the core income of a bank. Net NPAs to Net Advances It is a measure of the quality of assets in a situation where the management has not provided for loss on NPAs. the lower the risk involved in a bank’s investment. the higher the Government Securities to investment ratio. Net NPAs are Gross NPAs net of provisions on NPAs and interest in suspense account. The lower the ratio. 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. which. assets quality indicates the type of the debtors the bank is having. Thus. Assets Quality The quality of assets is an important parameter to gauge the degree of financial strength. The value of Total Assets excludes the revaluation of all the assets. It is arrived at by dividing the amount invested in government securities by total investment. 4. Since government securities are risk-free. Net NPAs are measured as a percentage of net advances. by conventional definition. In this ratio. Government Securities to Total Investments This ratio shows the risk involved in a bank’s investment. as a result. are generally. It is arrived at by dividing total investments by total 193 . The following ratios are necessary to assess assets quality: 1. the better is the quality of advances. where the management has not provided for loss on NPAs. considered as the most safe debt instrument.. 2. This ratio is used as a tool to measure the percentage of total assets locked up in investments. This indicates what types of advances the bank has made to generate interest income. Performance Measurement System in Indian Banking Sector in Camel Framework advances also include receivables. Gross NPAs to Net Advance It is a measure of the quality of assets in a situation. Government Securities. Total Investments to Total Assets Ratio Total investments to total assets indicate the extent of deployment of assets in investment as against advances. which. The Gross NPAs are measured as a percentage of Net Advances. 3. carries the lowest return.….

The ratios used to evaluate management efficiency are described as under: 1. By business. The lower the ratio. It sets vision and goals for the organization and sees that it achieves them.) into high earning advances. 5. we mean the sum of total deposits and total advances in a particular year. the better is for the bank. Percentage Change in Net NPAs This measure gives the movement in Net NPAs in relation to Net NPAs in the previous year. Performance Measurement System in Indian Banking Sector in Camel Framework assets. A higher ratio means that the bank has conservatively kept a high cushion of investments to guard against NPAs.…. This parameter is used to evaluate management efficiency as to assign premium to better quality banks and discount poorly managed ones. 194 . The higher the reduction in Net NPAs levels. It is arrived at by dividing the total business by total number of employees. Total advances to Total Deposits The ratio measures the efficiency of management in converting the deposits available with the bank (excluding other funds like equity capital. Net NPAs to Total Assets It is a measure of the quality of assets in a situation where the management has not provided for loss on NPAs. etc.. the better is the quality of advances. 4. Total deposits include demand deposits. term deposits and deposits of other banks. Management Efficiency Management efficiency is another vital component of the CAMEL Model that ensures the survival and growth of a bank. the Net NPAs are measured as a percentage of Total Assets. Here. It is given by the formula: %Change in Net NPAs = (Net NPAs at the end of the year – Net NPAs at the beginning of the year)/Net NPAs at the beginning of the year. The management of the bank takes crucial decisions depending on the risk perception. Business per Employee This tool measures the efficiency of all the employees of a bank in generating business for the bank. The ratios in this segment involve subjective analysis and efficiency of management. Total advances also include the receivables. 2. savings deposits.

The quality of earning is a very important criterion that determines the ability of a bank to earn consistently. 2. This is arrived at by dividing the operating profit by average working funds. higher is the efficiency of the management. It is an important measure of a bank’s core income (income from lending operations). The better utilization of funds will result in higher operating profit. The following ratios try to assess the quality of income in terms of income generated by core activity-income from lending operation. Average Working Funds (AWF) are the total resources (total assets or liabilities) employed by a bank. The higher the ratio. Here. Earning Quality Earning quality reflects quality of a bank’s profitability and its ability to earn consistently.…. Performance Measurement System in Indian Banking Sector in Camel Framework 3. A higher spread indicates the better earnings 195 .. going into the future. It is daily average of total assets / liabilities during a year. Profit per Employee This ratio measures the efficiency of employees at the branch level. treasury operation. It is arrived at by dividing the Profit after Tax (PAT) earned by the bank by the total number of employees. being the difference between the interest income and the interest expended as a percentage of total assets. this ratio will indicate how a bank has employed its working funds in generating profit. Return on Net Worth It is a measure of the profitability of a bank. Thus. and corporate advisory service and so on. 4. It also explains the sustainability and growth in earnings in the future. It basically determines the profitability of the bank. Operating Profit to Average Working Funds Ratio This ratio indicates how much a bank can earn from its operations net of the operating expenses for every rupee spent on working funds. It also gives valuable inputs to assess the real strength of a bank’s branch network. Spread or Net Interest Margin (NIM) to Total Assets NIM. This parameter gains importance in the light of the argument that much of bank’s income is earned through non-core activities like investments. 1. PAT is expressed as a percentage of Average Net Worth.

interest on deposits with the RBI. so that banks can generate profit while at the same time provide liquidity to the depositors. which will otherwise lead to declined earnings. For a bank. Liquidity Liquidity is very important for any organization dealing with money.. liquidity is a crucial aspect which represents its ability to meet its financial obligations. while at the same time ensuring that a good percentage of funds are invested in higher return generating investments. this ratio measures the return on assets employed. This ratio measures the income from lending operations as a percentage of the total income generated by the bank in a year. 3. Thus. Higher ratio indicates better earning potential in the future. Net Profit to Average Assets / Return on Average Capital Employed This ratio measures return on assets employed or the efficiency in utilization of assets. The ratios suggested to measure liquidity under CAMEL Model are as follows: 196 .interest Income to Total Income This measures the income from operations other than lending as a percentage of the total income. Non-interest income is the income earned by the banks excluding income on advances and deposits with the RBI. The bank generates higher fee income through innovative products and adapting the technology for sustained service levels. The interest income to total income indicates the ability of the bank in generating income from its lending. A fee-based income account for a major portion of a bank’s other incomes.…. 5. and other short-term and longterm loans. cash investments are the most liquid. Interest Income to Total Income Interest income is a basic source of revenue for banks. which is the average of total assets in the current year and previous year. A high liquidity ratio indicates that the bank is more affluent. and dividend income. Non. 4. Among a bank’s assets. Interest income includes dividend income and interest expended included interest paid on deposits. It is arrived at by dividing the net profit by average assets. Performance Measurement System in Indian Banking Sector in Camel Framework given the total assets. It is of utmost importance for a bank to maintain correct level of liquidity. loan from the RBI. Banks have to take proper care in hedging liquidity risk. Interest income includes income on advances.

…. Liquid Assets to Total Assets Liquid Assets include cash in hand. and money at call and short notice.2008). Total deposits include demand deposits. Liquid assets include cash in hand. balance with the RBI. Performance Measurement System in Indian Banking Sector in Camel Framework 1. Liquid Assets to Total Deposits This ratio measures the liquidity available to the depositors of a bank. corporation bonds. balance with the RBI. The liquid assets include cash in hand. balance with other banks (both in India and abroad).2002. This ratio measures the risk involved in the assets held by a bank. 2. share of regional rural banks (Joshi and joshi. This ratio measures the proportion of risk-free liquid assets invested in government securities as a percentage of the assets held by the bank and is arrived by dividing investment in government securities by the total assets. Approved Securities to Total Assets This is arrived at by dividing the total amount invested in approved securities by total assets. housing boards. balance with the RBI. Liquid Assets to Demand Deposits This ratio measures the ability of a bank to meet the demand from demand deposits in a particular year.. savings deposits. 197 . It is arrived at by dividing the liquid assets by total demand deposits.. term deposits and deposits of other financial institutions. and money at call and short notice. 3. Government Securities to Total Assets Government securities are the most liquid and safe investment. 2006. balance with other banks (both in India and abroad). This ratio is arrived by dividing liquid assets by total assets. Bodla and Verma. Sisdiya et al. 5. Approved securities are investments made in the state-associated bodies like electricity boards. balance with other banks (both in India and abroad). The proportion of liquid assets to total assets indicates the overall liquidity position of the bank. and money at call and short notice. 4.

0) 54 (27.0) 4.18 Note: The figures given in parentheses show the percentages.00%)..0) 11 (5.0) 54 (27.0) 37 (18. 198 . CAMEL Model involves computation of various ratios such as Capital Adequacy. The table reveals that majority of the bankers considered the capital adequacy ratio (96.00%) and advances to total asset (75. general securities to total investments (76.0) 28 (14.0) 82 (41.1 Opinion of Bankers Regarding Various Ratios under Capital Adequacy N=200 Ratios Most Important Important Neither Unimportant Important Nor Unimportant 4 (2. It is based on computation of different ratios to find out ranking of the banks according to their financial performance. Earning Quality and Liquidity of the banks.0) 51 (25.0) 3 (1. Different banks used different ratios (relationship) for each variable of CAMEL Model so as to find out ranking of various banks. Table 6.0) 96 (48. To examine the opinion of bankers regarding the importance of various ratios under capital adequacy.50%) as the most important ratio followed by debt-equity ratio (82. Performance Measurement System in Indian Banking Sector in Camel Framework Bankers' Opinion Regarding Importance of Various Ratios of Capital Adequacy Under CAMEL Model CAMEL Model is basically a ratio based Performance Measurement System based on financial measures for measuring the performance of the banks.5) 2 (1.0) 96 (48.0) 3 (1.5) 0 (0.5) Most Unimportant WAS Capital Adequacy Ratio (CAR) Debt-equity Ratio Advances to Total Assets General Securities to Total Investments 142 (71.00%).…. Management Efficiency.94 4.28 82 (41.1.5) 39 (19.97 3. Asset Quality.0) 10 (5. they were asked to give their opinion about various ratios under Capital Adequacy.5) 0 (0.0) 3. Their response has been presented in Table 6.5) 6 (3.

87 4.30 4. The weighted average scores indicate that all the bankers gave greater importance to all the listed ratios.030* * Significant at 5 per cent level of significance.20 4.11 3.09 4.69 4.89 4. capital adequacy (4. 199 .17 3.18 0.2 Weighted Average Scores Corresponding to Various Ratios under Capital Adequacy (Bank-wise Distribution) Ratios Capital Adequacy Ratio (CAR) Debt-equity Ratio Advances to Total Assets Public Sector Banks SBI PNB CB Private Sector Banks Mean p-values Total ICICI AXIS HDFC Total Values 4.71 to Total Investments 3. Bank-wise analysis of both public and private sector banks with regard to importance of various ratios under Capital Adequacy has been presented in Table 6.2.77 4.46 4.97 0. It means public sector banks accord more importance to capital adequacy ratio which is the premier ratio of measures of Capital Adequacy of CAMEL framework.84 4.00 3.94 0.….34 4.80 4.94).27 4. Table 6.18 4.00 4.57 4.225 General Securities 3.29 3. An overview of the weighted average scores as shown in the table reveals that bankers from private sector banks have accorded more importance to all the listed ratios under Capital Adequacy as compared to those from public sector banks except capital adequacy.28). Further.17 4.029* 3.09 3. debt-equity ratio (4.00 4.99 3.38 4. viz.06 4.77 4.17 3.97) and advances to total assets (3.06 3.54 4.28 0.43 4. Performance Measurement System in Indian Banking Sector in Camel Framework Weighted average scores for all the bankers have been calculated by assigning appropriate weights with regard to all the ratios under capital adequacy norms.. 210 4.18) followed by general securities to total investments (3.74 3. weighted average scores have also been calculated for the selected banks.

The null hypothesis that there is no significant difference in the perception of public and private sector bankers regarding importance of various ratios of capital adequacy under CAMEL Model stands accepted regarding ratios. Similarly. The response obtained from the bankers in this regard has been shown in Table 6. they were asked to give their opinion regarding importance of various ratios as measures of Assets Quality.3.00%) and net NPAs to net advances (92. bankers from Canara Bank assigned greater significance to all the ratios as compared to SBI and PNB.…. but it stands rejected for ratios like debt-equity ratio and general securities to total investment ratio. As regards other ratios like capital adequacy and advances to total assets ratio. such as gross NPAs to net advances (96. bankers from HDFC Bank gave more importance to ratios like capital adequacy. Performance Measurement System in Indian Banking Sector in Camel Framework Table 6. debt-equity and general securities to total investments followed by ICICI Bank which accorded more significance to advances to total assets ratio as is reflected by their respective weighted average scores for each ratio under capital adequacy measure of CAMEL Model.2 reveals that among the selected public sector banks.. and total investments to total assets (80. Opinion of Bankers Regarding Importance of Various Ratios of Assets Quality under CAMEL Model To ascertain the opinion of bankers regarding importance of Assets Quality in CAMEL Model. no significant variations have been observed (p-values>0.50%) as the most important ratios followed by percentage change in net NPAs (89. The estimated p-values using Mann-Whitney U-test with regard to each ratio of capital adequacy show that there is a significant difference among public and private sector banks with regard to debt-equity ratio and general securities to total investments.50%).05). such as capital adequacy ratio and advances to total assets ratio. net NPAs to total assets (86.00%). among the selected private sector banks.50%). 200 . The table explains that all the bankers considered various ratios under assets quality.

15 111 (55.5) 25 (12.5) 62 (31.61) and net NPAs to net advances (4.41). 201 .. Weighted average scores have been calculated for all the bankers with regard to various ratios under assets quality by putting appropriate weights. Performance Measurement System in Indian Banking Sector in Camel Framework Table 6.41 Note: The figures given in parentheses denote the percentages. bankers considered all the ratios as important for measuring assets quality of the banks.56 4. net NPAs total assets (4.0) 3 (1.50%) followed by total investments to total assets and net NPAs to total assets (1.0) Unimportant Most Unimportant WAS Gross NPAs to Net Advances Net NPAs to Net Advances Total Investments to Total Assets Net NPAs to Total Assets Percentage Change in Net NPAs 132 (66.0) 60 (30.39) and total investments to total assets (4.…. such as gross NPAs to net Advances (4.50) 125 (62.3 Opinion of Bankers Regarding Various Ratios under Assets Quality N=200 Ratios Most Important Important Neither important nor unimportan t 8 (4.5) 0 (0.0) 0 (0.0) 37 (18.0) 4.5) 76 (38.0) 56 (28. It is pertinent to note that only negligible number of bankers have considered the ratios like percentage change in net NPAs (1.5) 19 (9.5) 2 (1.56) followed by percentage change in net NPAs (4.5) 1 (0.5) 2 (1.0) 85 (42.0) 4.0) 0 (0.00% each) and net NPAs to net advances (0.0) 0 (0.5) 14 (7.15).50%) as unimportant to indicate the assets quality of the banks under CAMEL framework.0) 53 (26.0) 0 (0.61 129 (64. On the basis of weighted average scores.39 4.0) 0 (0.0) 4.

40 4.71 4. among the selected private sector banks. The bankers from PNB accorded greater importance to gross NPAs to net advances (4.43).45 4.60 4.69).56 0. bankers from ICICI Bank accorded importance to ratios like total investments to total assets (4.41 0.4 Weighted Average Scores Corresponding to Various Ratios under Assets Quality (Bank-wise Distribution) Ratios Gross NPAs to Net Advances Net NPAs to Net Advances Total Investments to Total Assets Net NPAs to Total Assets Percentage Change in Net NPAs Public Sector Banks Private Sector Banks Mean SBI PNB CB Total ICICI AXIS HDFC Total Values 4.86) and percentage change in net NPAs (4. The weighted average scores presented in the table reveal that public sector banks have accorded greater significance to all these ratios of assets quality as compared to private sector banks except total investment to total assets.37 4.57 4.40 4..40) and net NPAs to total assets (4. percentage change in net NPAs (4. there has been a mixed response to the different ratios under assets quality.33 4.61 p-values 0.07 4.51 4.007* 3.14 4.69 4. Performance Measurement System in Indian Banking Sector in Camel Framework Further.34 4.77 4.57) followed by Axis Bank considering gross NPAs to 202 .70 4.4.52 4. weighted average scores have also been computed for the selected banks under study.17 4. Similarly.15 0.63) and net NPAs to total assets (4.77 4.22 4.63 4.40 4.43 4.23 4.098 4.39 4.10 4.66 4.77). while bankers from SBI accorded importance to net NPAs to net advances (4.13 4.09 4.259 0.67) considered more important by the bankers from Canara Bank.60 4. Table 6. Among the selected public sector banks.11 4.43 4. Ratios like total investment to total assets (4.71 4.30 4.49 4.045* 4.53 4.46 4.09 4. Bank-wise analysis of both public and private sector banks with regard to various ratios as indicator of assets quality has been presented in Table 6.67 4.57 4.86 4.154 * Significant at 5 per cent level of significance.69 4.….

For rest of the ratios of assets quality.…. 203 . The data pertaining to their response has been presented in Table 6. both the banks assigned equal importance to the above mentioned ratios of assets quality as a measure of CAMEL framework. but total advances to total deposits (93. Bankers from public sector banks gave more importance to these ratios of assets quality as compared to private sector banks. Bankers Opinion Regarding Various Ratios of Management Efficiency Uunder CAMEL Framework The importance of various ratios under the Management Efficiency as a measure of CAMEL framework has been examined on the basis of response obtained from the Bankers in this regard..05). In other words.60) and net NPAs to net advances (4. Performance Measurement System in Indian Banking Sector in Camel Framework net advances (4. such as total investment to total assets. The estimated p-values using Mann-Whitney U-test with regard to various ratios under assets quality show that there is a significant difference among pubic and private sector banks with regard to ratios.43) as most important ratios as indicator of assets quality of the banks under the CAMEL framework. net NPAs to total assets and percentage change in net NPAs. The table shows that majority of the bankers considered all the ratios important. no significant difference among public and private sector banks have been observed (p-values > 0.5.05). such as gross NPAs to net advances and net NPAs to net advances under the measure of assets quality of CAMEL framework (pvalues < 0. The null hypothesis that there is no significant difference in the perception of public and private sector bankers regarding importance of various ratios of assets quality under CAMEL Model stands accepted in all other ratios except gross NPAs to net Advances and net NPAs to net Advances.00%) and business per employee (88.50%) appeared as the most important ratios of management efficiency under CAMEL framework.

5) 4.5) 5 (2.80). Further.48)..5) 1 (0.5) 22 (11. Among the selected public sector banks. Weighted average scores have been calculated for all the bankers regarding various ratios as measure of management efficiency by assigning appropriate weights.5) 49 (24. PNB accorded more importance to total advances to total deposits (4.5) 126 (63. bankers from all the three banks under study gave importance to different ratios of management efficiency as a measure of CAMEL model.71 each) followed by Canara Bank which accorded importance to return on net worth (4.6. An overview of weighted average scores as shown in Table 6.5) Most Unimportant AS 0 (0. 204 .0) 1 (0.43 4. total advances to total deposits (4.47 Note: The figures given in parentheses indicate the percentages.48 4. viz. profit per employee (4.5) (0.….54 W Total Advances to Total Deposits Return on Net Worth Business per Employee Profit per employee 64 (32.0) 0 (0. business per employee (4.5) 2 (1. Performance Measurement System in Indian Banking Sector in Camel Framework Table 6.5 Bankers Opinion Regarding Various Ratios under Management Efficiency N=200 Ratios Most Important 122 (61.43) as important.0) 17 (8.47) and return on net worth (4.5) 5 (2.5 reveals that bankers considered all the ratios. The table reveals that public sector banks provided greater significance to all the ratio of management efficiency in comparison to private sector banks as is evident from their weighted average scores.54).5) 23 (11.0) 125 (62. bank-wise weighted average scores have also been calculated with regard to public and private sector banks and presented in Table 6.0) 56 (28.0) 4.5) Important Neither Unimportant Important Nor Unimportant 13 1 (6.0) 51 (25.63) and business per employee and profit per employee (4.0) 117 (58.

43 0.62 4.03 4.43 4. However.60 4.….43).43 4. Similarly.71 4.80 4.57 4. among private sector banks.54 4. Performance Measurement System in Indian Banking Sector in Camel Framework Table 6.43 4. no significant difference between public and private sector banks has been observed.194 * Significant at 5 per cent level of significance. The Axis Bank gave importance to business per employee (4.905 4.05). ICICI Bank gave more importance to all the listed ratios for measuring management efficiency except business per employee as compared to Axis Bank and HDFC Bank as shown by their respective weighted average scores. Bankers from the public sector banks gave more importance to business per employee ratio as a measure of management efficiency as compared to the private sector banks as is evident from their weighted average scores.52 4.37 4.37 4.47 0.46 4.55 4. Both the banks accorded equal importance to the above 205 .51 4. The estimated p-values using Mann-Whitney U-test with regard to all the listed ratios of management efficiency show that there is a significant difference among the public and private sector banks as far as business per employee ratio is concerned (pvalue<0.63 4.43) as a measure of management efficiency when compared with other selected private sector banks.34 4.57 4.34 4.71 4.40 4.46 4.31 4.54 0. Regarding other measures of management efficiency like total advances to total deposits.71 4.51 4.23 4.004* 4. return on net worth and profit per employee.163 4. it is pertinent to note that HDFC Bank also assigned more importance to profit per employee (4.63 4.6 Weighted Average Scores Corresponding to Various Ratios under Management Efficiency (Bank-wise Distribution) Ratios Public Sector Banks SBI Total Advances to total deposits Return on Net Worth Business per employee Profit per employee PNB CB Private Sector Banks Mean Values p-values Total ICICI AXIS HDFC Total 4.48 0.26 4.41 4..31 4.53 4.

5) 79 (39.5) 22 (11.0) 20 (10.5) 80 (40.5) 3 (1.5) 25 (12.7.0) 87 (43..16 4. Opinion of Bankers Regarding Importance of Various Ratios as a Measure of Earning Quality of the Banks under CAMEL Model The significance of various ratios under the Earning Quality as a measure of CAMEL framework has been examined on the basis of response obtained from the bankers in this regard The data pertaining to their response has been presented in Table 6.5) Most Unimportant WAS Operating Profits to Average Working Funds Spread Net Profit to Average Assets Interest Income to Total Income Noninterest Income to Total Income 99 (49.5) 11 (5.5) 74 (37. 206 .5) 4 (2.7 Opinion of Bankers Regarding Various Ratios under Earning Quality N=200 Ratios Most Important Important Neither Unimportant Important Nor Unimportant 21 (10.….0) 94 (47. Table 6.5) 1 (0.0) 62 (31.5) 1 (0.5) 4.0) 5 (2.35 4.5) 101 (50.0) 1 (0.0) 1 (0.0) 4 (2.0) 22 (11.0) 0 (0. Thus.31 Note: The figures given in parentheses show the percentages.35 4.5) 107 (53.22 4. Performance Measurement System in Indian Banking Sector in Camel Framework mentioned measures of management efficiency as a measure of CAMEL framework. the null hypothesis that there is no significant difference in the perception of public and private sector bankers regarding importance of various ratios of management efficiency under CAMEL Model stands accepted except business per employee.0) 76 (38.

83 4.20 4.51 4.50 4. Table 6.000* 0.43 4.31).8 Weighted Average Scores Corresponding to Various Ratios under Earning Quality (Bank-wise Distribution) Ratios Operating Profits to Average Working Funds Spread Net Profit to Average Assets Interest Income to Total Income Noninterest Income to Total Income Public Sector Banks Private Sector Banks SBI PNB CB Total ICICI AXIS HDFC Total 4.32 4.59 4.13 4.00%).26 4.43 4. Weighted average scores have been computed for all the bankers with regard to various ratios as indicator of earning quality by assigning appropriate weights.23 3.17 4.00 4.31 0.001* * Significant at 5 per cent level of significance.35 4. such as operating profits to average working funds and interest income to total income (87.024* 4.53 4.27 4. weighted average scores have also been calculated for the selected banks of the study.22 0.35 p-values 0.50 4. such as operating profits to average working funds and spread (4.91 4.06 4. interest income to total income (4.73 4.35 each) followed by non-interest income to total income (4.26 4.17 4. spread (84.17 4.00%) as important to judge the earning quality of the banks.35 Mean Values 4.34 4.23 4.11 4.50% each) followed by non-interest income to total income (87. The weighted average scores reveal that bankers considered all the ratios as important measure of earning quality of the banks.35 4.50%) and net profit to average assets (83.54 4. Performance Measurement System in Indian Banking Sector in Camel Framework The table shows that all the bankers have considered all the ratios of earning quality.86 4.54 4.….23 3.46 4.43 4.50 4.645 4.725 4.26 4..10 4. Further.17 4.77 3.16 0.22) and net profit to average assets (4.29 3. Bank-wise analysis of both public and private sector banks regarding various ratios as a measure of earning quality have been presented in Table 207 .16).26 4.

….8. For rest of the measures of earning quality such as operating profits to average working funds and interest income to total income. The estimated p-values using Mann-Whitney U-test with regard to all the listed ratios of earning quality show that there is a significant difference among public and private sector banks as regards ratios like spread. viz. non-interest income to total income (4.29) as compared to other two selected private sector banks.05). Both the banks accorded equal importance to these measures of earning quality as a measure of CAMEL framework. it stands rejected for ratios like spread. they were asked to give their opinion about all the listed ratios such as liquid assets to total assets. Bankers from HDFC Bank provided greater significance to spread (4.43) ratio. Further.54) and netprofit to average asset and interest income to total income (4. no significant variations between public and private sector banks have been observed (pvalues >0. Among the selected public sector banks.50 each) except operating profits to average working funds (4. which is considered by the bankers of SBI.. spread (4. Bankers Opinion Regarding Various Ratios of Liquidity as a Measure of CAMEL Framework To examine the opinion of bankers regarding the importance of various ratios of Liquidity as a measure of CAMEL framework. The table explains that weighted average scores of public sector banks against all the ratios are higher as compared to the private sector banks. net profit to average assets and noninterest income to total income (p-values<0. net profit to average assets and non-interest income to total income ratio. among the selected private sector banks. such as operating profits to average working funds and interest income to total income ratio.73). bankers from Canara Bank considered all the ratios. The null hypothesis that there is no significant difference in the perception of public and private sector bankers regarding importance of various ratios of earning quality under CAMEL Model stands accepted in ratios. general securities to total 208 . Performance Measurement System in Indian Banking Sector in Camel Framework 6.05). bankers from ICICI Bank gave more importance to all the ratios as a measure of earning quality except spread as compared to Axis Bank and HDFC Bank as shown by their weighted average scores. Bankers from public sector banks gave more importance to these ratios as a measure of earning quality when compared with the Bankers from private sector banks. However.

0) (0. The response obtained from the bankers in this regard has been presented in Table 6.0) Important Neither Unimportant Important Nor Unimportant 18 0 (9. Performance Measurement System in Indian Banking Sector in Camel Framework assets. such as liquid assets to total assets (4.0) 86 (43.0) 41 (20.….86 4.0) 2 (1.0) 27 (13.50%).0) 65 (32.0) 2 (1.0) 12 (6. All these ratios depict the liquidity position of the banks.5) 88 (44.5) 28 (14.21) and liquid assets to demand deposits (4. liquid assets to total deposits (4. approved securities to total assets.0) WA S 4.45 Liquid Assets to Total Assets General Securities to Total Assets Approved Securities to Total Assets Liquid Assets to Demand Deposits Liquid Assets to Total Deposits 70 (35.50%) and general securities to total assets (72.5) 3.5) 85 (42.50%) have been more important followed by liquid assets to demand deposits (81. Table 6. and liquid assets to total deposits.5) 8 (4. liquid assets to demand deposits. Weighted average scores have been calculated for all the bankers with regard to various ratios as a measure of liquidity of the banks by assigning appropriate weights.50%) and liquid assets to total deposits (83.0) 82 (41.01 4.5) 4 (2. But the ratios. approved securities to total assets (75.9.5) Most Unimportant 1 (0.0) 7 (3.20 4.21 Note: The figures given in parentheses denote the percentages.45). The table shows that the bankers have considered all the ratios of liquidity important. A glance at the weighted average scores given in Table 6.0) 98 (49..9 reveals that bankers considered the ratios.5) 38 (19.0) 3 (1. such as liquid assets to total assets (90.0) 75 (37.00%).5) 46 (23.5) 3 (1.20) as more important and 209 .9 Bankers’ Opinion Regarding Various Ratios under Liquidity N=200 Ratios Most Important 111 (55.

31) followed by private sector banks which accorded importance to other ratios.003* 4.93 3.69 3..93).70 3.94 3.57).27 3.87 4.43 4. The public sector banks gave more importance to liquid assets to total assets (4.….01 .31 4.01) and general securities to total assets (3. Table 6.33 4.10 Weighted Average Scores Corresponding to Various Ratios under Liquidity (Bank-wise Distribution) Ratios Liquid Assets to Total Assets General Securities to Total Assets Approved Securities to Total Assets Liquid Assets to Demand Deposits Liquid Assets to Total Deposits Public Sector Banks Private Sector Banks Mean SBI PNB CB Total ICICI AXIS HDFC Total Values 4. Bank-wise analysis regarding various ratios as a measure of liquidity under CAMEL Model has been presented in Table 6.54 4. Performance Measurement System in Indian Banking Sector in Camel Framework approved securities to total assets (4.38) and liquid assets to total deposits (4.31 3.63 4. Further weighted average scores have also been calculated for the selected banks under study.77 4.242 3. Among the selected public sector banks.09 4. The table shows that both the public and private sector banks have given importance to different ratios.10.09) and general securities total assets (3.11 3.38 4.94 4.17 3.86 4.20 .63 3.57 4.92 4.010* 3.86 .30 4.90 3.06 4.06 4.40 4.249 * Significant at 5 per cent level of significance.11 4.26 4. bankers from Canara Bank accorded more importance to all the listed measures when compared to other selected public sector banks. such as SBI and PNB as indicated by their respective weighted average 210 . such as approved securities to total assets (4.29 4.63 4.00 4.86) as important.21 . liquid assets to demand deposits (4.23 4.139 4.29 4.31 4.23 4.79 4.01 4.00 3.54 4.45 p-values .

bankers from public sector gave more significance to all the ratios under these measures as compared to the private sector bankers. Regarding Liquidity measure of CAMEL Framework. Similarly. As far as other ratios like general securities to total assets. there is a significance difference in the opinion of public and private sector bankers. 211 . Management Efficiency and Earning Quality. Performance Measurement System in Indian Banking Sector in Camel Framework scores. Both the banks gave equal significance to these ratios of liquidity as a measure of CAMEL framework. bankers from ICICI Bank accorded greater significance to various ratios in comparison to Axis Bank and HDFC Bank as measures of liquidity as shown by their respective weighted average scores. An overview of all the measures. public sector bankers gave more significance to all the ratios except general securities to total assets. The above analysis provides that both the public and private sector bankers accorded importance to various measures of CAMEL Model. With regard to importance of other measures of CAMEL Model.. The null hypothesis that there is no significant difference in the perception of public sector and private bankers regarding importance of various ratios of liquidity under CAMEL Model stands accepted in all other ratios except liquid assets to total assets and liquid assets to demand deposits. among the selected private sector banks. approved securities to total assets and liquid assets to total deposits.05) are concerned. In respect to Capital Adequacy parameters. such as Assets Quality. Management Efficiency. The public sector bankers assigned more significance to this ratio of Capital Adequacy. The study shows that when these results were compared with the actual overall composite ranking of both public and private sector banks for the last 5 years. Earning Quality and Liquidity brings out that bankers from public sector considered these measures as well as various ratios under these measures more important for measuring the performance of the banks. The estimated p-values using Mann-Whitney U-test with regard to all the listed ratios of liquidity show that there is a significant difference among public and private sector banks as far as ratios like liquid assets to total assets and liquid assets to demand deposits (p-values<0. no significant variations between public and private sector banks have been observed. The private sector banks accorded more importance to all the ratios under Capital Adequacy as measure of CAMEL Framework except capital adequacy ratio which is considered to be a premier ratio. Assets Quality. Bankers from public sector banks accorded more importance to these ratios (measures) of liquidity as compared to those from private sector banks.…. such as Capital Adequacy.

212 . ICICI Bank. while in the case of private sector banks composite rank has been slipped from top to bottom as shown in Table 6. The SBI Bank maintained the same position for the last 2 years at 21 st rank.11 Overall Composite Ranking of Public and Private Sector Banks for the Last Five Years in CAMEL Framework Year 2004-05 2005-06 2006-07 2007-08 2008-09 Public Sector Banks SBI PNB CB 8 3 16 18 9 10 23 19 12 21 9 17 21 2 13 Private Sector Banks ICICI AXIS HDFC 1 3 2 4 14 3 9 12 7 14 13 12 10 8 6 Source: Chartered Financial Analyst. 6th rank and 8th rank respectively. Performance Measurement System in Indian Banking Sector in Camel Framework much compatibility has been observed. On the whole. October. it is observed that public sector banks outperformed private sector banks with regard to CAMEL framework as a method of measuring and managing performance of the bank under financial measure. Various Special Issues. The overall ranking for the period shows that public sector banks have shown an improvement.…. among the selected private sector banks. HDFC Bank and Axis Bank slipped from top three ranks to 10th rank. As far as selected public sector banks are concerned. The Analyst.. On the other hand. Table 6. composite rank in case of PNB stands at number 2 nd whereas that of Canara Bank improved from 17 th to 13th.11.

Chartered Financial Analyst. Special Issue.6-30. Y. A Division of Sage Publications. V.. Bala. A. and Verma. (2008). and Moghal. Chartered Financial Analyst.6-29.S. Second Edition. and Bharathi.New Delhi. B. and Surender. “Indian Banking Sector of Performance. pp. and Pemmaraju. pp..26-56.. A. Sisodiya. Sisodiya. Bharathi. (2005). D.34-61. S. Sisodiya. Bala. P. The ICFAI Journal of Bank Management. Vol. Special Issue. pp. Bala (2006). 213 .26-52. pp... (2006). Y.. Charted Financial Analyst.109-110. pp. “Indian Banking Coming of Age – Performance Snapshot 2005-2006”. “Evaluating Performance of Banks through CAMEL Model: A Case Study of SBI and ICICI”. Bharathi. S.3. Chartered Financial Analyst. and Kavitha.. October. Satish. Special Issue. October. pp. (2007). Jutur. Satish. Special Issue. Progress and Challenges”. Chartered Financial Analyst. Special Issue. D. Y. A. Joshi and Joshi (2002). Managing Indian Banks: The Challenges Ahead. I. S. S... No. October. R. pp. October. R.. “Indian Banking Performance and Development 2004-05”. October. Response Books.…. “Indian Banking Sector: Signs of Resilience”. Performance Measurement System in Indian Banking Sector in Camel Framework References Bodla. 49-63.5. (2009). “Indian Banking Industry: Sustaining the Growth Momentum”.

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