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Author: Aswin Rahul B V Sabu. K MBA student Senior Lecturer

Department of Business Administration, College of Engineering Trivandrum

Abstract --In today s scenario, the banking sector is one of the fastest growing sector and a lot of funds are invested in Banks. Also today s banking system is becoming more complex. So, we thought of evaluating the performance of the Kerala based private banks. The study analyses how well the South Indian Bank financially performs. In order to compare the performance of South Indian Bank two other leading Kerala based private banks are chosen for comparison. Also an internationally accepted CAMELS rating system is used here as a tool to identify the areas of improvements in this competitive environment. Keywords Camels Rating System 1. INTRODUCTION 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. The whole banking scenario has changed in the very recent past on the recommendations of Narasimham Committee. Further Basel II Norms were introduced to internationally standardize processes and make the banking industry more adaptive to the sensitive market risks. RBI had set up a working group headed by Shri.S.Padmanabhan to take fresh look at banking supervision during 1995. It suggested method for onsite supervision and subsequent rating of banks by RBI. The committee suggested that supervision of banks should focus on defined parameters of soundness, financial, managerial and operational efficiency. Accordingly, it recommended that the banks should be rated on 5 point scale of A to E, widely on the lines of international CAMELS rating model. It is considered as the best available methods

for evaluating book performance and healthy position of the bank since it considered all area of banking operations. 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 of study. Amongst these reforms and restructuring the CAMELS rating system has its own contribution to the way modern banking is looked up on now. 2. LITERATURE REVIEW 2.1 Camels rating system (Keeley and Gilbert) This study uses the capital adequacy component of the CAMELS rating system to assess whether regulators in the 1980s influenced inadequately capitalized banks to improve their capital. Using a measure of regulatory pressure that is based on publicly available information, he found that inadequately capitalized banks responded to regulators' demands for greater capital. This conclusion is consistent with that reached by Keeley (1988). Yet, a measure of regulatory pressure based on confidential capital adequacy ratings reveals that capital regulation at national banks was less effective than at state-chartered banks. This result strengthens a conclusion reached by Gilbert. [1] 2.2 Bank soundness - Camels ratings (Kenton Zumwalt) Indonesia

This study uses a unique data set provided by Bank Indonesia to examine the changing financial soundness of Indonesian banks during this crisis.

Bank Indonesia's non-public CAMELS ratings data allow the use of a continuous bank soundness measure rather than ordinal measures. In addition, panel data regression procedures that allow for the identification of the appropriate statistical model are used. They argue the nature of the risks facing the Indonesian banking community calls for the addition of a systemic risk component to the Indonesian ranking system. The empirical results show that during Indonesia's stable economic periods, four of the five traditional CAMELS components provide insights into the financial soundness of Indonesian banks. However, during Indonesia's crisis period, the relationships between financial characteristics and CAMELS ratings deteriorate and only one of the traditional CAMELS components earnings objectively discriminates among the ratings. [2] 2.3 Camels model examination (Rebel cole and Jeffery Gunther) To assess the accuracy of CAMELS ratings in predicting failure, Rebel Cole and Jeffery Gunther use as a benchmark an off-site monitoring system based on publicly available accounting data. Their findings suggest that, if a bank has not been examined for more than two quarters, off-site monitoring systems usually provide a more accurate indication of survivability than its CAMELS rating. The lower predictive accuracy for CAMELS ratings "older" than two quarters causes the overall accuracy of CAMELS ratings to fall substantially below that of off-site monitoring systems. The higher predictive accuracy of off-site systems derives from both their timeliness-an updated off-site rating is available for every bank in every quarter-and the accuracy of the financial data on which they are based. Cole and Gunther conclude that off-site monitoring systems should continue to play a prominent role in the supervisory process, as a complement to on-site examinations. [3] 2.4 Check the risk taken by banks by Camels model The deregulation of the U.S. banking industry has fostered increased competition in banking markets, which in turn has created incentives for banks to operate more efficiently and take more risk. They examine the degree to which supervisory CAMELS ratings reflect the level of risk taken by banks and the risk-taking efficiency of those banks (i.e., whether increased risk levels generate higher expected returns). Their results suggest that supervisors not only distinguish between the risk-taking of efficient and inefficient banks, but they also permit efficient

banks more latitude in their investment strategies than inefficient banks. [4] 2.5 Banks performance evaluation by camels model (Hirtle and Lopez) Despite the continuous use of financial ratios analysis on banks performance evaluation by banks' regulators, opposition to it skill thrive with opponents coming up with new tools capable of flagging the over-all performance ( efficiency) of a bank. This research paper was carried out; to find the adequacy of CAMELS in capturing the overall performance of a bank; to find the relative weights of importance in all the factors in CAMELS; and lastly to inform on the best ratios to always adopt by banks regulators in evaluating banks' efficiency. In addition, the best ratios in each of the factors in CAMELS were identified. For example, the best ratio for Capital Adequacy was found to be the ratio of total shareholders' fund to total risk weighted assets. The paper concluded that no one factor in CAMELS suffices to depict the overall performance of a bank. Among other recommendations, banks' regulators are called upon to revert to the best identified ratios in CAMELS when evaluating banks performance. [5] 3. STATEMENT OF THE PROBLEM In the recent years the financial system especially the banks have undergone numerous changes in the form of reforms, regulations & norms CAMELS framework for the performance evaluation of banks is an addition to this. The study is conducted to analyze how well the South Indian Bank financially performs and to identify area of improvement. 4. DATA COLLECTION: 4.1 Data collection from primary sources:

Sources of collecting primary data are direct personal interview and observation method. 4.2 Data collection from secondary sources:

Sources of collecting data were annual reports, periodically published accounts of bank journals, company website and other official websites.

5. THEORETICAL PRESPECTIVE-CAMELS RATING: An international bank rating system where bank supervisory authorities rate institutions is according to six factors. This rating is based on financial statements of the bank and on-site examination by regulators. If a bank has an average score less than two out of five it is considered to be less than satisfactory establishments. The system helps the supervisory authority identify banks that are in need of attention. These ratings are not released to the public but only to the top management of the banking company to prevent a bank which has a bad CAMELS rating. It is being used by the United States government in response to the global financial crisis of 2008 to help it decide which banks to provide special help for and which to not as part of its capitalization program authorized by the Emergency Economic Stabilization Act of 2008. 5.1 Components The components of a bank's condition that are assessed: (C) Capital adequacy, (A) Asset quality, (M) Management quality, (E) Earnings quality, (L) Liquidity and (S) Systems and control 6. METHODOLOGY: The historical approach of research is the research on past social forces, which shaped the present. It is an attempt to describe and learn from the past. Historical type of financial research in the field of analysis is used here. It assess the overall financial position of the South Indian Bank by taking in to account the financial data for a period of 6years from 2003 to 2009 and compare the data of financial year 2008-09 of South Indian Bank that of Federal Bank and Dhanalakshmi Bank.

7. DATA ANALYSIS AND DISCUSSION: Based on CAMELS rating system, ratio analysis and comparison methods have been used as

a tool for the analysis of the data collected. The findings and suggestions of analysis are discussed in this section. 7.1 Sample Data Analysis Capital Adequacy Ratio(CAR) of SIB

8. FINDINGS: . Capital adequacy reflects the financial condition of the bank and its ability to meet the additional capital requirement whenever the need arises. For this purpose it is required that banks should maintain a minimum of 9% CAR as per the banking regulation and supervisory practices (BASEL committee) of BIS (Bureau of Indian Standards). The bank has been able to maintain a CAR well above this required standard throughout the period of study undertaken. This helps the bank to achieve the level of confidence sufficient to absorb unforeseen losses. . Non performing asset is advance or borrowed accounts which do not generate income for the bank. Its percentage with regards to advances is reducing year by year. This shows the asset quality of South Indian Bank. The securitization Act plays an important role in reduction of NPA of the bank. This helps the bank to sell assets without court intervention. Steps taken by SIB to bring down the NPA level are listed as follows. 1. With the participation of leading banks/financial institutions, SIB has promoted an Asset Reconstruction Company of India Ltd. which acquired

some of the impaired financial assets of the bank. 2. In order to contain the growth of NPA the bank has conducted recovery camps, recovery camps, recovery campaigns were conducted with the participation of employees. Quality circle was introduced which helped to create awareness among the staff members and a team spirit in the recovery process. 3. One time settlement was another effective method taken by the bank in the recovery of NPA accounts. . The yield on advance has been increasing from the year 2005-06 and it shows how well the bank has been able to deploy its funds in the best possible way. The main reason for decrease in the yield on advance is intense competition in the banking sector. To meet this challenge the banking products and services have become more competitive and they are being perceived as commodities. To leverage competitive environment, they are reducing interest rate to increase customer base. This affects yield on advances. . The business of the bank has been increasing year after year. The advance to deposit ratio has increased from 50.69% in 2003-04 to 68.97% in 2007-08, which shows a shift in portfolio from dependence on nonbanking activities to banking activities for income generation. . The ROA has shown a decreasing trend though the bank has shown an increase in the year 2008-09 than the previous year. Still the bank is generating an income equivalent to only 1.09% of the average assets of the bank, while Federal Bank has 1.48% and Dhanalakshmi Bank has 1.21%. the bank is not able to generate high return on assets due to huge expenses incurred on maintaining the deposits. . The bank has the highest ratio of Liquid Assets to Demand Deposits among the three banks under study. This is because the bank has lower number of demand deposits as compared to other two banks. In a way it is appreciable as the bank is in a higher liquidity position than the other banks but on the other hand bank has lower amount of low cost deposits as compared to other banks which has impacted negatively the bank s earnings capacity. . All the three banks have maintained a relatively similar amount of government securities as a percentage of total assets which is around 20%. This is good for the bank as it ensures a good liquidity position

for the bank. It is noted that SIB has reduced the dependence on investments from 38.67% in 2003-04 to 19.85% in 2008-09 (effect of shift in portfolio from non- banking to banking). . The bank s non-interest income is very low as compared to other two banks but the interest income is very high. The bank has to take measures to improve its non-interest income while maintaining the interest income as far as possible. . The EPS of the bank has shown a mixed trend over the 6 years of study. The fluctuation in EPS is due to changes in the net worth of the bank. The EPS for the year 2008-09 was rs.17.23, where as that of federal bank was rs.29.26and for Dhanalakshmi bank is rs.9.16. 9. SUGGESTIONS: . At present the minimum capital adequacy as per RBI norms is 9%. And SIBs CAR is 14.76%. by comparing the CAR of peer group of banks, sibs CAR is low. At present the banks asset is increasing but bank s capital base is remaining the same. So the bank needs to issue additional capital. . NPA adversely affect the asset quality of the bank. During 2008-09, the percentage NPA to advance of SIB was 1.13% and the Federal Bank was 0.30% and that of Dhanalakshmi bank was 0.88%. SIB has to take aggressive recovery steps to reduce NPAs the minimum level to maintain better asset quality of the bank. . In order to increase ROA, bank should maintain lower cost of deposits and maximize profits of the bank. . The bank has to focus on priority sector lending. The scope and extend of priority has undergone a significant change in the post reform period with several new areas

and sectors being brought under in purview. Agriculture, small enterprise, micro credit, retail trade education loans, and housing loans up to 20 lakhs are the broad categories include in the priority sector. . At present interest income is a major source of income for SIB. In order to increase the portion of non interest income, the bank has to concentrate more on para banking activities such as insurance, portfolio management, mutual funds, investment banking etc. . In order to run a bank smoothly the bank must make a proper balance between earnings and liquidity. Too much liquidity position adversely affects the return. In order to increase liquidity amount, SIB should prefer line of credit, securitization activities for liquidity purposes in excess of SLR. . In order to improve the labor productivity, SIB has to concentrate more on training and executive development program in accordance with technological change. 10. CONCLUSION In spite of gloomy economic scenario world across, the Indian economy and Indian banking system have shown extreme resilience and have been able to sustain themselves as a result of high domestic demand, productivity, credit growth and high levels of savings and investment. Of this, the old generation banks with next generation banking ideas and with prudent control over their asset portfolio, is least affected. For any innovation or development, the Indian banks used to look up to the west for guidance. The fast growth for new generation banks was viewed with the present economic crisis because of their least involvement in overseas investments. Here an analysis was done to understand how well the South Indian Bank financially performs. In order to compare the performance of South Indian Bank two other leading Kerala based private banks were choosen for comparison. The analysis was based on the CAMELS rating system. It reveals that South Indian Bank has improved in almost all parameters ie Capital adequacy, Asset quality, Management quality, Earnings quality, Liquidity and Systems and control. Also the relative performance of South Indian Bank is extremely good compared to other banks. All this results shows the financial soundness of the bank. The top level management and the policy

makers of the bank have their faculties tuned in the right direction. In technological up gradation, SIB is quite a few steps ahead of peer group banks. The dedicated and hard working man power of this institution is another reason for the bank s progress. REFERENCES Journals:

1. Keeley and Gilbert, Journal of Financial Services Research, Camel rating system, Springer Netherlands, Vol 9, No 2, June 1995. 2. Kenton Zumwalt, Review of Quantitative Finance and Accounting, Bank soundness camel ratings Indonesia, Springer Netherlands, Vol 19, No 3, November 2002. 3. Rebel Cole and Jeffery Gunther, Financial Industry Studies Working Paper, Camel model examination, Vol 3, No 5, October 2000. 4. Sheeba Kapil, The ICFAI Journal of Bank Management, Check the risk taken by banks by camel model, Institute of Chartered Financial Analysts of India (ICFAI) University Press, Vol. 5, No 3, August 2006. 5. Hirtle and Lopez, ABA Banking Journal, Banks performance evaluation by camel model, Finance Trade Publications, Vol 4, No 4, March 1, 2008. Bibilography: 6. Practical auditing by Prof.P Saravanavel and Prof. R.G. Saxena, V.Murali, Himalaya publications, 1st edition, 2002. 7. Financial Management by Prassana Chandra, Tata Mc Graw Hill Publications, November 2007. 8. Financial and management accounting, Pauline Weetman, Prentice hall, 4th edition, June 2006. 9. Financial management, I.M.Pandey, Vikas publication house pvt Ltd, 4th edition, 2002

Websites: 10. 11. 12. 13. 14. 15. 16.

Reports: 17. Annual reports of South Indian Bank Ltd. of the years 2003-04 to 2008-09. 18. Annual report of Federal Bank Ltd.of the year 2008-09. 19. Annual report of Dhanalakshmi Bank of the year 2008-09.