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Table of content

Chapter No.
Content List of Tables List of Figures Executive summary
Page No
Introduction Overview of Banking Objective of study Research methodology Limitat
ion of study
Review of literature CAMELS Framework
4. 5.
Findings and conclusion Bibliography
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List of Tables
Table No. 3.1 3.2 3.3 3.4 3.5 3.6 3.7 Table Content Capital Adequacy ratio Earni
ngs Per Share Net Profit Margin Return On Assets Credit Deposit Ratio Gross NPA
Net NPA Page No.
List of Figures
Figure No. 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 3.11 3.12
Page No.
Capital Adequacy ratio Earnings Per Share Net Profit Margin Return On Assets Cre
dit Deposit Ratio Gross NPA Net NPA
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Executive Summery The banking sector has been undergoing a complex, but comprehe
nsive phase of restructuring since 1991, with a view to make it sound, efficient
, and at the same time it is forging its links firmly with the real sector for p
romotion of savings, investment and growth. Although a complete turnaround in ba
nking sector performance is not expected till the completion of reforms, signs o
f improvement are visible in some indicators under the CAMELS framework. Under t
his bank is required to enhance capital adequacy, strengthen asset quality, impr
ove management, increase earnings and reduce sensitivity to various financial ri
sks. The almost simultaneous nature of these developments makes it difficult to
disentangle the positive impact of reform measures.
CAMELS Framework
CAMELS’ norms are the supervisory framework consisting of risk-monitoring factors
used for evaluating the performance of banks. This framework involves the analys
is of six groups of indicators reflecting the health of financial institutions.
The indicators are as follows:
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The whole banking scenario has changed in the very recent past on the recommenda
tions of Narasimham Committee. Further BASELL II Norms were introduced to intern
ationally standardize processes and make the banking industry more adaptive to t
he sensitive market risks. Amongst these reforms and restructuring the CAMELS Fr
amework has its own contribution to the way modern banking is looked up on now.
The attempt here is to see how various ratios have been used and interpreted to
reveal a bank’s performance and how this particular model encompasses a wide range
of parameters making it a widely used and accepted model in today’s scenario. The
project attempts to analyse the performance of Axis bank on the basis of CAMELS
model and gives suggestions on the basis of the finding of the analysis. The ov
erall strategy of Axis bank is also studied to gain a better understanding of th
e working of the bank and to identify its strength and weakness.
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Without a sound and effective banking system in India it cannot have a healthy e
conomy. The banking system of India should not only be hassle free but it should
be able to meet new challenges posed by the technology and any other external a
nd internal factors. For the past three decades India s banking system has sever
al outstanding achievements to its credit. The most striking is its extensive re
ach. It is no longer confined to only metropolitans or cosmopolitans in India. I
n fact, Indian banking system has reached even to the remote corners of the coun
try. This is one of the main reasons of India s growth process. The government s
regular policy for Indian bank since 1969 has paid rich dividends with the nati
onalization of 14 major private banks of India. Not long ago, an account holder
had to wait for hours at the bank counters for getting a draft or for withdrawin
g his own money. Today, he has a choice. Gone are days when the most efficient b
ank transferred money from one branch to other in two days. Now it is simple as
instant messaging or dials a pizza. Money has become the order of the day. The f
irst bank in India, though conservative, was established in 1786. From 1786 till
today, the journey of Indian Banking System can be segregated into three distin
ct phases. They are as mentioned below:
Early phase from 1786 to 1969 of Indian Banks Nationalization of Indian Banks an
d up to 1991 prior to Indian banking sector Reforms. New phase of Indian Banking
System with the advent of Indian Financial & Banking Sector Reforms after 1991.
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PHASE-01 The General Bank of India was set up in the year 1786. Next came Bank o
f Hindustan and Bengal Bank. The East India Company established Bank of Bengal (
1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and
called it Presidency Banks. These three banks were amalgamated in 1920 and Imper
ial Bank of India was established which started as private shareholders banks, m
ostly Europeans shareholders. In 1865 Allahabad Bank was established and first t
ime exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with he
adquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of Indi
a, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Res
erve Bank of India came in 1935. During the first phase the growth was very slow
and banks also experienced periodic failures between 1913 and 1948. There were
approximately 1100 banks, mostly small. To streamline the functioning and activi
ties of commercial banks, the Government of India came up with The Banking Compa
nies Act, 1949 which was later changed to Banking Regulation Act 1949 as per ame
nding Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with ex
tensive powers for the supervision of banking in India as the Central Banking Au
thority. During those day’s public has lesser confidence in the banks. As an after
math deposit mobilization was slow. Abreast of it the savings bank facility prov
ided by the Postal department was comparatively safer. Moreover, funds were larg
ely given to traders.
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PHASE-02 Government took major steps in this Indian Banking Sector Reform after
independence. In 1955, it nationalized Imperial Bank of India with extensive ban
king facilities on a large scale especially in rural and semi-urban areas. It fo
rmed State Bank of India to act as the principal agent of RBI and to handle bank
ing transactions of the Union and State Governments all over the country. Seven
banks forming subsidiary of State Bank of India was nationalized in 1960 on 19th
July, 1969, major process of nationalization was carried out. It was the effort
of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial ba
nks in the country were nationalized. Second phase of nationalization Indian Ban
king Sector Reform was carried out in 1980 with seven more banks. This step brou
ght 80% of the banking segment in India under Government ownership. The followin
g are the steps taken by the Government of India to Regulate Banking Institution
s in the Country: • 1949: Enactment of Banking Regulation Act. • 1955: Nationalizati
on of State Bank of India. • 1959: Nationalization of SBI subsidiaries. • 1961: Insu
rance cover extended to deposits. • 1969: Nationalization of 14 major banks. • 1971:
Creation of credit guarantee corporation. • 1975: Creation of regional rural bank
s. • 1980: Nationalization of seven banks with deposits over 200 crore.
After the nationalization of banks, the branches of the public sector bank India
rose to approximately 800% in deposits and advances took a huge jump by 11,000%
. Banking in the sunshine of Government ownership gave the public implicit faith
and immense confidence about the sustainability of these institutions.
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This phase has introduced many more products and facilities in the banking secto
r in its reforms measure. In 1991, under the chairmanship of M Narasimham, a com
mittee was set up by his name which worked for the liberalization of banking pra
ctices. The country is flooded with foreign banks and their ATM stations. Effort
s are being put to give a satisfactory service to customers. Phone banking and n
et banking is introduced. The entire system became more convenient and swift. Ti
me is given more importance than money. The financial system of India has shown
a great deal of resilience. It is sheltered from any crisis triggered by any ext
ernal macroeconomics shock as other East Asian Countries suffered. This is all d
ue to a flexible exchange rate regime, the foreign reserves are high, the capita
l account is not yet fully convertible, and banks and their customers have limit
ed foreign exchange exposure.
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The central bank of the country is the Reserve Bank of India (RBI). It was estab
lished in April 1935 with a share capital of Rs. 5 crores on the basis of the re
commendations of the Hilton Young Commission. The share capital was divided into
shares of Rs. 100 each fully paid which was entirely owned by private sharehold
ers in the beginning. The Government held shares of nominal value of Rs. 2, 20,0
00. Reserve Bank of India was nationalized in the year 1949. The general superin
tendence and direction of the Bank is entrusted to Central Board of Directors of
20 members, the Governor and four Deputy Governors, one Government official fro
m the Ministry of Finance, ten nominated Directors by the Government to give rep
resentation to important elements in the economic life of the country, and four
nominated Directors by the Central Government to represent the four local Boards
with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Boards c
onsist of five members each Central Government appointed for a term of four year
s to represent territorial and economic interests and the interests of co-operat
ive and indigenous banks. The Reserve Bank of India Act, 1934 was commenced on A
pril 1, 1935. The Act, 1934 (II of 1934) provides the statutory basis of the fun
ctioning of the Bank. The Bank was constituted for the need of following:
• To regulate the issue of banknotes • To maintain reserves with a view to securing
monetary stability and • To operate the credit and currency system of the country
to its advantage.
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Functions of Reserve Bank of India
The Reserve Bank of India Act of 1934 entrust all the important functions of a c
entral bank the Reserve Bank of India. • Issue Of Notes Under Section 22 of the Re
serve Bank of India Act, the Bank has the sole right to issue bank notes of all
denominations. The distribution of one rupee notes and coins and small coins all
over the country is undertaken by the Reserve Bank as agent of the Government.
The Reserve Bank has a separate Issue Department which is entrusted with the iss
ue of currency notes. The assets and liabilities of the Issue Department are kep
t separate from those of the Banking Department. Originally, the assets of the I
ssue Department were to consist of not less than two-fifths of gold coin, gold b
ullion or sterling securities provided the amount of gold was not less than Rs.
40 crores in value. The remaining three-fifths of the assets might be held in ru
pee coins, Government of India rupee securities, eligible bills of exchange and
promissory notes payable in India. Due to the exigencies of the Second World War
and the post-was period, these provisions were considerably modified. Since 195
7, the Reserve Bank of India is required to maintain gold and foreign exchange r
eserves of Ra. 200 crores, of which at least Rs. 115 crores should be in gold. T
he system as it exists today is known as the minimum reserve system.
Banker to Government
The second important function of the Reserve Bank of India is to act as Governme
nt banker, agent and adviser. The Reserve Bank is agent of Central Government an
d of all State Governments in India excepting that of Jammu and Kashmir. The Res
erve Bank has the obligation to transact Government business,
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via. to keep the cash balances as deposits free of interest, to receive and to m
ake payments on behalf of the Government and to carry out their exchange remitta
nces and other banking operations. The Reserve Bank of India helps the Governmen
t - both the Union and the States to float new loans and to manage public debt.
The Bank makes ways and means advances to the Governments for 90 days. It makes
loans and advances to the States and local authorities. It acts as adviser to th
e Government on all monetary and banking matters.
Bankers Bank and Lender of the Last Resort
The Reserve Bank of India acts as the bankers bank. According to the provisions
of the Banking Companies Act of 1949, every scheduled bank was required to main
tain with the Reserve Bank a cash balance equivalent to 5% of its demand liabili
ties and 2 per cent of its time liabilities in India. By an amendment of 1962, t
he distinction between demand and time liabilities was abolished and banks have
been asked to keep cash reserves equal to 3 per cent of their aggregate deposit
liabilities. The minimum cash requirements can be changed by the Reserve Bank of
India. The scheduled banks can borrow from the Reserve Bank of India on the bas
is of eligible securities or get financial accommodation in times of need or str
ingency by rediscounting bills of exchange. Since commercial banks can always ex
pect the Reserve Bank of India to come to their help in times of banking crisis
the Reserve Bank becomes not only the banker s bank but also the lender of the l
ast resort.
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Controller of Credit
The Reserve Bank of India is the controller of credit i.e. it has the power to i
nfluence the volume of credit created by banks in India. It can do so through ch
anging the Bank rate or through open market operations. According to the Banking
Regulation Act of 1949, the Reserve Bank of India can ask any particular bank o
r the whole banking system not to lend to particular groups or persons on the ba
sis of certain types of securities. Since 1956, selective controls of credit are
increasingly being used by the Reserve Bank. The Reserve Bank of India is armed
with many more powers to control the Indian money market. Every bank has to get
a license from the Reserve Bank of India to do banking business within India, t
he license can be cancelled by the Reserve Bank of certain stipulated conditions
are not fulfilled. Every bank will have to get the permission of the Reserve Ba
nk before it can open a new branch. Each scheduled bank must send a weekly retur
n to the Reserve Bank showing, in detail, its assets and liabilities. This power
of the Bank to call for information is also intended to give it effective contr
ol of the credit system. The Reserve Bank has also the power to inspect the acco
unts of any commercial bank. As supreme banking authority in the country, the Re
serve Bank of India, therefore, has the following powers: a) It holds the cash r
eserves of all the scheduled banks. (b) It controls the credit operations of ban
ks through quantitative and qualitative controls. (c) It controls the banking sy
stem through the system of licensing, inspection and calling for information. (d
) It acts as the lender of the last resort by providing rediscount facilities to
scheduled banks.
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Custodian of Foreign Reserves
The Reserve Bank of India has the responsibility to maintain the official rate o
f exchange. According to the Reserve Bank of India Act of 1934, the Bank was req
uired to buy and sell at fixed rates any amount of sterling in lots of not less
than Rs. 10,000. The rate of exchange fixed was Re. 1 = sh. 6d. Since 1935 the B
ank was able to maintain the exchange rate fixed at lsh.6d. Though there were pe
riods of extreme pressure in favor of or against the rupee. After India became a
member of the International Monetary Fund in 1946, the Reserve Bank has the res
ponsibility of maintaining fixed exchange rates with all other member countries
of the I.M.F. Besides maintaining the rate of exchange of the rupee, the Reserve
Bank has to act as the custodian of India s reserve of international currencies
. The vast sterling balances were acquired and managed by the Bank. Further, the
RBI has the responsibility of administering the exchange controls of the countr
Supervisory functions
In addition to its traditional central banking functions, the Reserve bank has c
ertain non-monetary functions of the nature of supervision of banks and promotio
n of sound banking in India. The Reserve Bank Act, 1934, and the Banking Regulat
ion Act, 1949 have given the RBI wide powers of supervision and control over com
mercial and co-operative banks, relating to licensing and establishments, branch
expansion, liquidity of their assets, management and methods of working, amalga
mation, reconstruction, and liquidation. The RBI is authorized to carry out peri
odical inspections of the banks and to call for returns and necessary informatio
n from them. The nationalization of 14 major
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Indian scheduled banks in July 1969 has imposed new responsibilities on the RBI
for directing the growth of banking and credit policies towards more rapid devel
opment of the economy and realization of certain desired social objectives. The
supervisory functions of the RBI have helped a great deal in improving the stand
ard of banking in India to develop on sound lines and to improve the methods of
their operation.
Promotional functions
The Bank now performs variety of developmental and promotional functions, which,
at one time, were regarded as outside the normal scope of central banking. The
Reserve Bank was asked to promote banking habit, extend banking facilities to ru
ral and semi-urban areas, and establish and promote new specialized financing ag
encies. Accordingly, the Reserve Bank has helped in the setting up of the IFCI a
nd the SFC; it set up the Deposit Insurance Corporation in 1962, the Unit Trust
of India in 1964, the Industrial Development Bank of India also in 1964, the Agr
icultural Refinance Corporation of India in 1963 and the Industrial Reconstructi
on Corporation of India in 1972. These institutions were set up directly or indi
rectly by the Reserve Bank to promote saving habit and to mobilize savings, and
to provide industrial finance as well as agricultural finance. The Bank has deve
loped the co-operative credit movement to encourage saving, to eliminate moneyle
nders from the villages and to route its short term credit to agriculture. The R
BI has set up the Agricultural Refinance and Development Corporation to provide
long-term finance to farmers.
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“To study the strength of using CAMELS framework as a tool of performance evaluati
on for banking institutions.”
RESEARCH METHODOLOGY Research methodology is a very organized and systematic way
through which a particular case or problem can be solved efficiently. It is a s
tep-by-step logical process, which involves:
Defining a problem Laying the objectives of the research Sources of data Methods
of data collection Tabulation of data Data analysis & processing Conclusions &
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In the recent years the financial system especially the banks have undergone num
erous changes in the form of reforms, regulations & norms. CAMELS framework for
the performance evaluation of banks is an addition to this. The study is conduct
ed to analyze the pros & cons of this model.
To do an in-depth analysis of the model. To analyze 5 banks to get the desired r
esults by using CAMELS as a tool of measuring performance.
1. Type of research: Descriptive i)
The survey was done for three banks. The study environment
was the Banking industry. ii) DATA SOURCE:
Primary Data: Primary data was collected from the company balance sheets and com
pany profit and loss statements. Secondary Data: Secondary data on the subject w
as collected from ICFAI journals, company prospectus, company annual reports and
IMF websites.
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SAMPLING TECHNIQUE : Convenience sampling: Convenience sampling was done for the
selection of the banks.
iv) PLAN OF ANALYSIS: The data analysis of the information got from the balance
sheets was done and ratios were used. Graph and charts were used to illustrate t
2. Identification of the parameter:-
The different parameters that were selected for the comparison is:CAR Net Profit
Margin EPS Credit Deposit Ratio GNPA NPA ROA.
4. Sampling plane:-
Sample- ICICI, HDFC, IDBI, AXIS Bank and State Bank of India.
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1) The study was limited to 5 banks. 2) Time and resource constrains. 3) The met
hod discussed pertains only to banks though it can be used for performance evalu
ation of other financial institutions. 4) The study was completely done on the b
asis of ratios calculated from the balance sheets. 5) It has not been possible t
o get a personal interview with the top management employees of all banks under
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Review of literature
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Number of studies has been conducted about the use of CAMEL model. And number of
reviews on the previous researches is present but due to paucity of time, a few
snapshots of literature are given here.
Swindle, C, (1995) This study uses the capital adequacy component of the
CAMEL rating system to assess whether regulators in the 1980s influenced inadequ
ately capitalized banks to improve their capital. Using a measure of regulatory
pressure that is based on publicly available information, I find that inadequate
ly capitalized banks responded to regulators demands for greater capital. This
conclusion is consistent with that reached by Keeley (1988). Yet, a measure of r
egulatory pressure based on confidential capital adequacy ratings reveals that c
apital regulation at national banks was less effective than at statechartered ba
Cole, Rebel A. and Gunther(1995) Their findings suggest that, if a bank
has not been examined for more than two quarters, off-site monitoring systems us
ually provide a more accurate indication of survivability than its CAMEL rating.
The lower predictive accuracy for CAMEL ratings "older" than two quarters cause
s the overall accuracy of CAMEL ratings to fall substantially below that of off-
site monitoring systems. The higher predictive accuracy of offsite systems deriv
es 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 b
ased. 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
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Gilbert R., Meyer A., & Vaughan M. (2000) This article examines the
potential contribution to bank supervision of a model designed to predict which
banks will have their supervisory ratings downgraded in future periods. Bank sup
ervisors rely on various tools of off-site surveillance to track the condition o
f banks under their jurisdiction between on-site examinations, including econome
tric models. One of the models that the Federal Reserve System uses for surveill
ance was estimated to predict bank failures. The number of banks downgraded to p
roblem status in recent years has been substantially larger than the number of b
ank failures. During a period of few bank failures, the relevance of this bank f
ailure model for surveillance depends to some extent on the accuracy of the mode
l in predicting which banks will have their supervisory ratings downgraded to pr
oblem status in future periods. This paper compares the ability of two models to
predict downgrades of supervisory ratings to problem status: the Board staff mo
del, which was estimated to predict bank failures, and a model estimated to pred
ict downgrades of supervisory ratings. We find that both models do about as well
in predicting downgrades of supervisory ratings for the early 1990s. Over time,
however, the ability of the downgrade model to predict downgrades improves rela
tive to that of the model estimated to predict failures. This pattern reflects t
he value of using a model for surveillance that can be re-estimated frequently.
We conclude that the downgrade model may prove to be a useful supplement to the
Board s model for estimating failures during periods when most banks are healthy
, but that the downgrade model should not be considered a replacement for the cu
rrent surveillance framework.
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Lacewell, Stephen Kent (2001). Stage one in the estimation of cost and
alternative profit efficiency scores using a national model and a size-specific
model. Previous research referred in the paper asserts that an efficiency compon
ent should be added to the current CAMEL regulatory rating system to account for
the ever-increasing diverse components of modern financial institutions. Stage
two is the selection and computation of financial ratios deemed to be highly cor
related with each component of the CAMEL rating. The research shows that there i
s definitely a relationship between bank efficiency scores and financial ratios
used to proxy a bank s CAMEL rating. It is also evident that certain types of ef
ficiency models are better suited to large banks than to small banks and vice ve
Richard S Barr, Kory A Killgo, Thomas F Siems, & Sheri Zimmel. (2002) This study
reviews previous research on the efficiency and performance
of financial institutions and uses Siems and Barr s (1998) data envelopment anal
ysis (DEA) model to evaluate the relative productive efficiency of US commercial
banks 1984-1998. It explains the methodology, discusses the input and output me
asures used and relates bank performance measures to efficiency. It describes th
e CAMEL rating system used by bank examiners and regulators; and finds that bank
s with high efficiency scores also have strong CAMEL ratings. The study summariz
es the other relationship identified and recommends the use of DEA to help analy
sts and policy makers understand organizations in greater depth, regulators and
examiners to develop monitoring tools and banks to benchmark their processes.
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Godlewski (2003) has tested the validity of the CAMEL rating typology for
bank s default modification in emerging markets. He focused explicitly on using
a logical model applied to a database of defaulted banks in emerging markets. He
found that the principle results of the early warning signals models follow the
CAMEL typology. The proxy variables of bank solvability, assets quality and li
quidity, particularly loan losses provisions, management quality, profitability,
and intermediation rate have a negative impact on the one year probability of b
ank s default.
Said and Saucier (2003) examined the liquidity, solvency and efficiency of
Japanese Banks. Using CAMEL rating methodology, for a representative sample of J
apanese banks for the period 1993-1999, they evaluated capital adequacy, assets
and management quality, earnings ability and liquidity position. They quantified
bank’s managerial quality by calculating X-inefficiency using data envelopment an
alysis (DEA). Results support the view that the major problem of failed banks wa
s not inefficiency of management, but below standard capital adequacy and consid
erable problems in their assets quality. Significantly above average efficiency
of ailing banks could be explained by a survival strategy that pushed them to dr
astically improve management.
Derviz et al. (2004) investigated the determinants of the movements in the
long term Standard & Poor’s and CAMEL bank ratings in the Czech Republic during th
e period when the three biggest banks, representing approximately 60% of the Cze
ch banking sector s total assets, were privatized (i.e., the time span 1998-2001
). The same list of explanatory variables corresponding to the CAMEL rating inpu
ts employed by the Czech National Bank s banking sector
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regulators were examined for both ratings in order to select significant predict
ors among them. They employed an ordered response logit model to analyze the mon
thly long-run S&P rating and a panel data framework for the analysis of the quar
terly CAMEL rating.
Gasbarro et al. (2004) examined the changing financial soundness of
Indonesian banks during the crisis. During the recent Southeast Asian financial
crisis, numerous banks failed quickly and unexpectedly. This study used 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 CAMEL ratin
gs data allowed the use of a continuous bank soundness measure rather than ordin
al measures. They argued that the nature of the risks facing the Indonesian bank
ing community calls for the addition of a systemic risk component to the Indones
ian ranking system. The empirical results show that during Indonesia s stable ec
onomic periods, four of the five traditional CAMEL components provided insights
into the financial soundness of Indonesian banks.
Baral (2005) analysed the performance of joint ventures banks in Nepal on the
basis of CAMEL Model. For the purpose of the study data set published by joint v
enture banks in their annual reports was used. This paper examined the financial
health of joint venture banks in the CAMEL framework. The health check up was c
onducted on the basis of publicly available financial data. It concluded that th
e health of joint venture banks is better than that of the other commercial bank
s. In addition, the perusal of indicators of different components of CAMEL indic
ated that the financial health of joint venture banks was not so strong to manag
e the possible large scale shocks to their balance sheet and their health was fa
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Kapil (2005) examined the relationship between the CAMEL ratings and the
bank stock performance. The viability of the banks was analyzed on the basis of
the Offsite Supervisory Exam Model—CAMEL Model. The M for Management was not consi
dered in this paper because all Public Sector Banks, (PSBs) were government regu
lated, and also because all other four components—C, A, E and L—reflect management q
uality. The remaining four components were analyzed and rated to judge the compo
site rating. Part A of the study analyzed the interbank performance by determini
ng their CAEL composite score. Part B of the study assessed the relation between
the banks’ composite CAMEL ratings with the banks’ stock performance. The paper rev
ealed that the Off-site Supervisory Exam Model, CAMEL, is related to the banks’ st
ock performance in the capital market.
Hirtle and Lopez, (2005),This research paper was carried out; to find the
adequacy of CAMEL in capturing the overall performance of a bank; to find the re
lative weights of importance in all the factors in CAMEL; and lastly to inform o
n the best ratios to always adopt by banks regulators in evaluating banks effic
iency. In addition, the best ratios in each of the factors in CAMEL were identif
ied. 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 t
hat no one factor in CAMEL 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 CAMEL when evaluating banks performance.
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Sarker (2005) examined the CAMEL model for regulation and supervision of
Islamic banks by the central bank in Bangladesh. With the experience of more tha
n two decades the Islamic banking now covers more than one third of the private
banking system of the country and no concerted effort has been made to add a Sha
riah component both in on-site and off-site banking supervision system of the ce
ntral bank. Rather it is being done on the basis of the secular supervisory and
regulatory system as chosen for the traditional banks and financial institutions
. To fill the gap, an attempt had been made in this paper to review the CAMEL st
andard set by the BASEL Committee for off-site supervision of the banking instit
utions. This study enabled the regulators and supervisors to get a Shariah bench
mark to supervise and inspect Islamic banks and Islamic financial institutions f
rom an Islamic perspective.
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"Nuts and Bolts" Concept of CAMELS Framework?
Capital Adequacy Asset Quality Management Soundness Earnings & Profitability Liq
uidity Sensitivity To Market Risk
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Capital Adequacy
A Capital Adequacy Ratio is a measure of a bank s capital. It is expressed as a
percentage of a bank s risk weighted credit exposures. Also known as ""Capital t
o Risk Weighted Assets Ratio (CRAR). Capital adequacy is measured by the ratio o
f capital to risk-weighted assets (CRAR). A sound capital base strengthens confi
dence of depositors. This ratio is used to protect depositors and promote the st
ability and efficiency of financial systems around the world.
Asset Quality
Asset quality determines the robustness of financial institutions against loss o
f value in the assets. The deteriorating value of assets, being prime source of
banking problems, directly pour into other areas, as losses are eventually writt
enoff against capital, which ultimately jeopardizes the earning capacity of the
institution. With this backdrop, the asset quality is gauged in relation to the
level and severity of non-performing assets, adequacy of provisions, recoveries,
distribution of assets etc. Popular indicators include non-performing loans to
advances, loan default to total advances, and recoveries to loan default ratios.
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The solvency of financial institutions typically is at risk when their assets be
come impaired, so it is important to monitor indicators of the quality of their
assets in terms of overexposure to specific risks, trends in nonperforming loans
, and the health and profitability of bank borrowers— especially the corporate sec
tor. Share of bank assets in the aggregate financial sector assets: In most emer
ging markets, banking sector assets comprise well over 80 per cent of total fina
ncial sector assets, whereas these figures are much lower in the developed econo
mies. Furthermore, deposits as a share of total bank liabilities have declined s
ince 1990 in many developed countries, while in developing countries public depo
sits continue to be dominant in banks. In India, the share of banking assets in
total financial sector assets is around 75 per cent, as of end-March 2008. There
is, no doubt, merit in recognizing the importance of diversification in the ins
titutional and instrument-specific aspects of financial intermediation in the in
terests of wider choice, competition and stability. However, the dominant role o
f banks in financial intermediation in emerging economies and particularly in In
dia will continue in the medium-term; and the banks will continue to be “special” fo
r a long time. In this regard, it is useful to emphasise the dominance of banks
in the developing countries in promoting non-bank financial intermediaries and s
ervices including in development of debt-markets. Even where role of banks is ap
parently diminishing in emerging markets, substantively, they continue to play a
leading role in non-banking financing activities, including the development of
financial markets. One of the indicators for asset quality is the ratio of non-p
erforming loans to total loans (GNPA). The gross non-performing loans to gross a
dvances ratio is more indicative of the quality of credit decisions made by bank
ers. Higher GNPA is indicative of poor credit decision-making.
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NPA: Non-Performing Assets
Advances are classified into performing and non-performing advances (NPAs) as pe
r RBI guidelines. NPAs are further classified into sub-standard, doubtful and lo
ss assets based on the criteria stipulated by RBI. An asset, including a leased
asset, becomes non-performing when it ceases to generate income for the Bank.
An NPA is a loan or an advance where:
1. Interest and/or instalment of principal remains overdue for a period of more
than 90 days in respect of a term loan; 2. The account remains "out-of-order i
n respect of an Overdraft or Cash Credit (OD/CC); 3. The bill remains overdue fo
r a period of more than 90 days in case of bills purchased and discounted; 4. A
loan granted for short duration crops will be treated as an NPA if the installme
nts of principal or interest thereon remain overdue for two crop seasons; and
A loan granted for long duration crops will be treated as an NPA if the installm
ents of principal or interest thereon remain overdue for one crop season. The Ba
nk classifies an account as an NPA only if the interest imposed during any quart
er is not fully repaid within 90 days from the end of the relevant quarter. This
is a key to the stability of the banking sector. There should be no hesitation
in stating that Indian banks have done a remarkable job in containment of non-pe
rforming loans (NPL) considering the overhang issues and overall difficult envir
onment. For 2008, the net NPL ratio for the Indian scheduled
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commercial banks at 2.9 per cent is ample testimony to the impressive efforts be
ing made by our banking system. In fact, recovery management is also linked to t
he banks’ interest margins. The cost and recovery management supported by enabling
legal framework hold the key to future health and competitiveness of the Indian
banks. No doubt, improving recovery-management in India is an area requiring ex
peditious and effective actions in legal, institutional and judicial processes.
Management Soundness
Management of financial institution is generally evaluated in terms of capital a
dequacy, asset quality, earnings and profitability, liquidity and risk sensitivi
ty ratings. In addition, performance evaluation includes compliance with set nor
ms, ability to plan and react to changing circumstances, technical competence, l
eadership and administrative ability. In effect, management rating is just an am
algam of performance in the above-mentioned areas.
Sound management is one of the most important factors behind financial instituti
ons’ performance. Indicators of quality of management, however, are primarily appl
icable to individual institutions, and cannot be easily aggregated across the se
ctor. Furthermore, given the qualitative nature of management, it is difficult t
o judge its soundness just by looking at financial accounts of the banks. Nevert
heless, total expenditure to total income and operating expense to total expense
helps in gauging the management quality of the banking institutions.
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Sound management is key to bank performance but is difficult to measure. It is p
rimarily a qualitative factor applicable to individual institutions. Several ind
icators, however, can jointly serve—as, for instance, efficiency measures do—as an i
ndicator of management soundness. The ratio of non-interest expenditures to tota
l assets (MGNT) can be one of the measures to assess the working of the manageme
nt. . This variable, which includes a variety of expenses, such as payroll, work
ers compensation and training investment, reflects the management policy stance.
Efficiency Ratios demonstrate how efficiently the company uses its assets and h
ow efficiently the company manages its operations.
Asset Turnover Ratio = Total Revenue/Total Assets
Indicates the relationship between assets and revenue. Companies with low profit
margins tend to have high asset turnover, those with high profit margins have l
ow asset turnover - it indicates pricing strategy This ratio is more useful for
growth companies to check if in fact they are growing revenue in proportion to s
ales Asset Turnover Analysis: This ratio is useful to determine the amount of sa
les that are generated from each dollar of assets. As noted above, companies wit
h low profit margins tend to have high asset turnover, those with high profit ma
rgins have low asset turnover.
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Earnings and Profitability
Earnings and profitability, the prime source of increase in capital base, is exa
mined with regards to interest rate policies and adequacy of provisioning. In ad
dition, it also helps to support present and future operations of the institutio
ns. The single best indicator used to gauge earning is the Return on Assets (ROA
), which is net income after taxes to total asset ratio.
Strong earnings and profitability profile of banks reflects the ability to suppo
rt present and future operations. More specifically, this determines the capacit
y to absorb losses, finance its expansion, pay dividends to its shareholders, an
d build up an adequate level of capital. Being front line of defense against ero
sion of capital base from losses, the need for high earnings and profitability c
an hardly be overemphasized. Although different indicators are used to serve the
purpose, the best and most widely used indicator is Return on Assets (ROA). How
ever, for in-depth analysis, another indicator Net Interest Margins (NIM) is als
o used. Chronically unprofitable financial institutions risk insolvency. Compare
d with most other indicators, trends in profitability can be more difficult to i
nterpret— for instance, unusually high profitability can reflect excessive risk ta
king. ROA-Return On Assets
An indicator of how profitable a company is relative to its total assets. ROA gi
ves an idea as to how efficient management is at using its assets to generate
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earnings. Calculated by dividing a company s annual earnings by its total assets
, ROA is displayed as a percentage. Sometimes this is referred to as "return on
The formula for return on assets is:
ROA tells what earnings were generated from invested capital (assets). ROA for p
ublic companies can vary substantially and will be highly dependent on the indus
try. This is why when using ROA as a comparative measure, it is best to compare
it against a company s previous ROA numbers or the ROA of a similar company. The
assets of the company are comprised of both debt and equity. Both of these type
s of financing are used to fund the operations of the company. The ROA figure gi
ves investors an idea of how effectively the company is converting the money it
has to invest into net income. The higher the ROA number, the better, because th
e company is earning more money on less investment. For example, if one company
has a net income of $1 million and total assets of $5 million, its ROA is 20%; h
owever, if another company earns the same amount but has total assets of $10 mil
lion, it has an ROA of 10%. Based on this example, the first company is better a
t converting its investment into profit. When you really think about it, managem
ent s most important job is to make wise choices in allocating its resources. An
ybody can make a profit by throwing a ton of money at a problem, but very few ma
nagers excel at making large profits with little investment
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An adequate liquidity position refers to a situation, where institution can obta
in sufficient funds, either by increasing liabilities or by converting its asset
s 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 ra
te sensitive assets (RSA) and rate sensitive liabilities (RSL) is maintained. Th
e most commonly used tool to evaluate interest rate exposure is the Gap between
RSA and RSL, while liquidity is gauged by liquid to total asset ratio.
Initially solvent financial institutions may be driven toward closure by poor ma
nagement of short-term liquidity. Indicators should cover funding sources and ca
pture large maturity mismatches. The term liquidity is used in various ways, all
relating to availability of, access to, or convertibility into cash.
An institution is said to have liquidity if it can easily meet its needs for cas
h either because it has cash on hand or can otherwise raise or borrow cash. A ma
rket is said to be liquid if the instruments it trades can easily be bought or s
old in quantity with little impact on market prices. An asset is said to be liqu
id if the market for that asset is liquid.
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The common theme in all three contexts is cash. A corporation is liquid if it ha
s ready access to cash. A market is liquid if participants can easily convert po
sitions into cash—or conversely. An asset is liquid if it can easily be converted
to cash. The liquidity of an institution depends on:
the institution s short-term need for cash; cash on hand; available lines of cre
dit; 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 t
o the institution?
The liquidity of a market is often measured as the size of its bid-ask spread, b
ut this is an imperfect metric at best. More generally, Kyle (1985) identifies t
hree components of market liquidity:
Tightness is the bid-ask spread; Depth is the volume of transactions necessary t
o move prices; Resiliency is the speed with which prices return to equilibrium f
ollowing a large trade. Examples of assets that tend to be liquid include foreig
n exchange; stocks traded in the Stock Exchange or recently issued Treasury bond
s. Assets that are often illiquid include limited partnerships, thinly traded bo
nds or real estate. Cash maintained by the banks and balances with central bank,
to total asset ratio (LQD) is an indicator of bank s liquidity. In general, ban
ks with a larger volume
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of liquid assets are perceived safe, since these assets would allow banks to mee
t unexpected withdrawals. Credit deposit ratio is a tool used to study the liqui
dity position of the bank. It is calculated by dividing the cash held in differe
nt forms by total deposit. A high ratio shows that there is more amounts of liqu
id cash with the bank to met its clients cash withdrawals.
Sensitivity To Market Risk
It refers to the risk that changes in market conditions could adversely impact e
arnings and/or capital. Market Risk encompasses exposures associated with change
s in interest rates, foreign exchange rates, commodity prices, equity prices, et
c. While all of these items are important, the primary risk in most banks is int
erest rate risk (IRR), which will be the focus of this module. The diversified n
ature of bank operations makes them vulnerable to various kinds of financial ris
ks. Sensitivity analysis reflects institution’s exposure to interest rate risk, fo
reign exchange volatility and equity price risks (these risks are summed in mark
et risk). Risk sensitivity is mostly evaluated in terms of management’s ability to
monitor and control market risk. Banks are increasingly involved in diversified
operations, all of which are subject to market risk, particularly in the settin
g of interest rates and the carrying out of foreign exchange transactions. In co
untries that allow banks to make trades in stock markets or commodity exchanges,
there is also a need to monitor indicators of equity and commodity price risk.
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Interest Rate Risk Basics In the most simplistic terms, interest rate risk is a
balancing act. Banks are trying to balance the quantity of re-pricing assets wit
h the quantity of re-pricing liabilities. For example, when a bank has more liab
ilities re-pricing in a rising rate environment than assets re-pricing, the net
interest margin (NIM) shrinks. Conversely, if your bank is asset sensitive in a
rising interest rate environment, your NIM will improve because you have more as
sets re-pricing at higher rates.
An extreme example of a re-pricing imbalance would be funding 30-year fixedrate
mortgages with 6-month CDs. You can see that in a rising rate environment the im
pact on the NIM could be devastating as the liabilities re-price at higher rates
but the assets do not. Because of this exposure, banks are required to monitor
and control IRR and to maintain a reasonably well-balanced position.
Liquidity risk is financial risk due to uncertain liquidity. An institution migh
t lose liquidity if its credit rating falls, it experiences sudden unexpected ca
sh outflows, or some other event causes counterparties to avoid trading with or
lending to the institution. A firm is also exposed to liquidity risk if markets
on which it depends are subject to loss of liquidity.
Liquidity risk tends to compound other risks. If a trading organization has a po
sition in an illiquid asset, its limited ability to liquidate that position at s
hort notice will compound its market risk. Suppose a firm has offsetting cash fl
ows with two different counterparties on a given day. If the counterparty that o
wes it a payment defaults, the firm will have to raise cash from other sources t
o make
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its payment. Should it be unable to do so, it too we default. Here, liquidity ri
sk is compounding credit risk.
Accordingly, liquidity risk has to be managed in addition to market, credit and
other risks. Because of its tendency to compound other risks, it is difficult or
impossible to isolate liquidity risk. In all but the most simple of circumstanc
es, comprehensive metrics of liquidity risk don t exist. Certain techniques of a
ssetliability management can be applied to assessing liquidity risk. If an organ
ization s cash flows are largely contingent, liquidity risk may be assessed usin
g some form of scenario analysis. Construct multiple scenarios for market moveme
nts and defaults over a given period of time. Assess day-to-day cash flows under
each scenario. Because balance sheets differed so significantly from one organi
zation to the next, there is little standardization in how such analyses are imp
lemented. Regulators are primarily concerned about systemic
implications of liquidity risk.
Business activities entail a variety of risks. For convenience, we distinguish b
etween different categories of risk: market risk, credit risk, liquidity risk, e
tc. Although such categorization is convenient, it is only informal. Usage and d
efinitions vary. Boundaries between categories are blurred. A loss due to wideni
ng credit spreads may reasonably be called a market loss or a credit loss, so ma
rket risk and credit risk overlap. Liquidity risk compounds other risks, such as
market risk and credit risk. It cannot be divorced from the risks it compounds.
An important but somewhat ambiguous distinguish is that between market risk and
business risk. Market risk is exposure to the uncertain market value of a portfo
lio. Business risk is exposure to uncertainty in economic value that cannot
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be marked-to-market. The distinction between market risk and business risk paral
lels the distinction between market-value accounting and book-value accounting.
The distinction between market risk and business risk is ambiguous because there
is a vast "gray zone" between the two. There are many instruments for which mar
kets exist, but the markets are illiquid. Mark-to-market values are not usually
available, but mark-to-model values provide a more-or-less accurate reflection o
f fair value. Do these instruments pose business risk or market risk? The decisi
on is important because firms employ fundamentally different techniques for mana
ging the two risks. Business risk is managed with a long-term focus. Techniques
include the careful development of business plans and appropriate management ove
rsight. bookvalue accounting is generally used, so the issue of day-to-day perfo
rmance is not material. The focus is on achieving a good return on investment ov
er an extended horizon.
Market risk is managed with a short-term focus. Long-term losses are avoided by
avoiding losses from one day to the next. On a tactical level, traders and portf
olio managers employ a variety of risk metrics —duration and convexity, the Greeks
, beta, etc.—to assess their exposures. These allow them to identify and reduce an
y exposures they might consider excessive. On a more strategic level, organizati
ons manage market risk by applying risk limits to traders or portfolio managers
activities. Increasingly, value-at-risk is being used to define and monitor th
ese limits. Some organizations also apply stress testing to their portfolios.
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HDFC Bank Ltd. is a major Indian financial services company based in Mumbai, inc
orporated in August 1994, after the Reserve Bank of India allowed establishing p
rivate sector banks. The Bank was promoted by the Housing Development Finance Co
rporation, a premier housing finance company (set up in 1977) of India. HDFC Ban
k has 1,412 branches and over 3,295 ATMs, in 528 cities in India, and all branch
es of the bank are linked on an online real-time basis. As of September 30, 2008
the bank had total assets of INR 1006.82 billion. For the fiscal year 2008-09,
the bank has reported net profit of Rs.2,244.9 crore, up 41% from the previous f
iscal. Total annual earnings of the bank increased by 58% reaching at Rs.19,622.
8 crore in 2008-09. HDFC Bank is one of the Big Four Banks of India, along with
State Bank of India, ICICI Bank and Axis Bank — its main competitors.
HDFC Bank was incorporated in the year of 1994 by Housing Development Finance Co
rporation Limited (HDFC), India s premier housing finance company. It was among
the first companies to receive an in principle approval from the Reserve Bank
of India (RBI) to set up a bank in the private sector.The Bank commenced its ope
rations as a Scheduled Commercial Bank in January 1995 with the help of RBI s li
beralization policies. In a milestone transaction in the Indian banking industry
, Times Bank Limited (promoted by Bennett, Coleman & Co. / Times Group) was merg
ed with HDFC Bank Ltd., in 2000. This was the first merger of two private banks
in India. As
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per the scheme of amalgamation approved by the shareholders of both banks and th
e Reserve Bank of India, shareholders of Times Bank received 1 share of HDFC Ban
k for every 5.75 shares of Times Bank. In 2008 HDFC Bank acquired Centurion Bank
of Punjab taking its total branches to more than 1,000. The amalgamated bank em
erged with a strong deposit base of around Rs. 1,22,000 crore and net advances o
f around Rs. 89,000 crore. The balance sheet size of the combined entity is over
Rs. 1,63,000 crore. The amalgamation added significant value to HDFC Bank in te
rms of increased branch network, geographic reach, and customer base, and a bigg
er pool of skilled manpower.
Figure 3.1 HDFC BANK
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State Bank of India is the largest banking and financial services company in Ind
ia, by almost every parameter - revenues, profits, assets, market capitalization
, etc. The bank traces its ancestry to British India, through the Imperial Bank
of India, to the founding in 1806 of the Bank of Calcutta, making it the oldest
commercial bank in the Indian Subcontinent. The Government of India nationalized
the Imperial Bank of India in 1955, with the Reserve Bank of India taking a 60%
stake, and renamed it the State Bank of India. In 2008, the Government took ove
r the stake held by the Reserve Bank of India. SBI provides a range of banking p
roducts through its vast network of branches in India and overseas, including pr
oducts aimed at NRIs. The State Bank Group, with over 16,000 branches, has the l
argest banking branch network in India. With an asset base of $260 billion and $
195 billion in deposits, it is a regional banking behemoth. It has a market shar
e among Indian commercial banks of about 20% in deposits and advances, and SBI a
ccounts for almost one-fifth of the nation s loans.
SBI has tried to reduce over-staffing by computerizing operations and "golden ha
ndshake" schemes that led to a flight of its best and brightest managers. These
managers took the retirement allowances and then went on to become senior manage
rs in new private sector banks.
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The State bank of India is the 29th most reputed company in the world according
to Forbes.
Figure 3.2 SBI
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Axis Bank, formally UTI Bank, is a financial services firm that had begun operat
ions in 1994, after the Government of India allowed new private banks to be esta
blished. The Bank was promoted jointly by the Administrator of the Specified Und
ertaking of the Unit Trust of India (UTI-I), Life Insurance Corporation of India
(LIC), General Insurance Corporation Ltd., National Insurance Company Ltd., The
New India Assurance Company, The Oriental Insurance Corporation and United Indi
a Insurance Company UTI-I holds a special position in the Indian capital markets
and has promoted many leading financial institutions in the country. The bank c
hanged its name to Axis Bank in April 2007 to avoid confusion with other unrelat
ed entities with similar name. After the Retirement of Mr. P. J. Nayak, Shikha S
harma was named as the bank s managing director and CEO on 20 April 2009. As on
the year ended March 31, 2009 the Bank had a total income of Rs 13,745.04 crore
(US$ 2.93 billion) and a net profit of Rs. 1,812.93 crore (US$ 386.15 million).
On February 24, 2010, Axis Bank announced the launch of AXIS CALL & PAY on atom
, a unique mobile payments solution using Axis Bank debit cards. Axis Bank is t
he first bank in the country to provide a secure debit card-based payment servic
e over IVR. Axis Bank is one of the Big Four Banks of India, along with ICICI Ba
nk, State Bank of India and HDFC Bank
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Branch Network At the end of March 2009, the Bank has a very wide network of mor
e than 835 branch offices and Extension Counters. Total number of ATMs went up t
o 3595. The Bank has loans now (as of June 2007) account for as much as 70 per c
ent of the bank’s total loan book of Rs 2,00,000 crore. In the case of Axis Bank,
retail loans have declined from 30 per cent of the total loan book of Rs 25,800
crore in June 2006 to around 23 per cent of loan book of Rs.41,280 crore (as of
June 2007). Even over a longer period, while the overall asset growth for Axis B
ank has been quite high and has matched that of the other banks, retail exposure
s grew at a slower pace. The bank, though, appears to have insulated such pressu
res. Interest margins, while they have declined from the 3.15 per cent seen in 2
003-04, are still hovering close to the 3 per cent mark.
Figure 3.3 AXIS BANK
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The Industrial Development Bank of India Limited commonly known by its acronym I
DBI is one of India s leading public sector banks and 4th largest Bank in overal
l ratings. RBI categorized IDBI as an "other public sector bank". It was establi
shed in 1964 by an Act of Parliament to provide credit and other facilities for
the development of the fledgling Indian industry. It is currently 10th largest d
evelopment bank in the world in terms of reach with 1210 ATMs, 720 branches and
486 centers. Some of the institutions built by IDBI are the National Stock Excha
nge of India (NSE), the National Securities Depository Services Ltd (NSDL), the
Stock Holding Corporation of India (SHCIL), the Credit Analysis & Research Ltd,
the Export-Import Bank of India (Exim Bank), the Small Industries Development ba
nk of India(SIDBI), the Entrepreneurship
Development Institute of India, and IDBI BANK, which today is owned by the India
n Government, though for a brief period it was a private scheduled bank. The Ind
ustrial Development Bank of India (IDBI) was established on July 1, 1964 under a
n Act of Parliament as a wholly owned subsidiary of the Reserve Bank of India. I
n 16 February 1976, the ownership of IDBI was transferred to the Government of I
ndia and it was made the principal financial institution for coordinating the ac
tivities of institutions engaged in financing, promoting and developing industry
in the country. Although Government shareholding in the Bank came down below 10
0% following IDBI’s public issue in July 1995, the former continues to be the majo
r shareholder (current shareholding: 52.3%).
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During the four decades of its existence, IDBI has been instrumental not only in
establishing a well-developed, diversified and efficient industrial and institu
tional structure but also adding a qualitative dimension to the process of indus
trial development in the country. IDBI has played a pioneering role in fulfillin
g its mission of promoting industrial growth through financing of medium and lon
g-term projects, in consonance with national plans and priorities. Over the year
s, IDBI has enlarged its basket of products and services, covering almost the en
tire spectrum of industrial activities, including manufacturing and services. ID
BI provides financial assistance, both in rupee and foreign currencies, for gree
n-field projects as also for expansion, modernization and diversification purpos
es. In the wake of financial sector reforms unveiled by the government since 199
2, IDBI evolved an array of fund and fee-based services with a view to providing
an integrated solution to meet the entire demand of financial and corporate adv
isory requirements of its clients.
Figure 3.4 IDBI
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ICICI Bank (formerly Industrial Credit and Investment Corporation of India) is a
major banking and financial services organization in India. It is the 4th large
st bank in India and the largest private sector bank in India by market capitali
zation. The bank also has a network of 1,700+ branches (as on 31 March 2010) and
about 4,721 ATMs in India and presence in 19 countries, as well as some 24 mill
ion customers (at the end of July 2007). ICICI Bank offers a wide range of banki
ng products and financial services to corporate and retail customers through a v
ariety of delivery channels and specialization subsidiaries and affiliates in th
e areas of investment banking, life and non-life insurance, venture capital and
asset management. (These data are dynamic.) ICICI Bank is also the largest issue
r of credit cards in India. ICICI Bank s shares are listed on the stock exchange
s at Kolkata and Vadodara, Mumbai and the National Stock Exchange of India Limit
ed; its ADRs trade on the New York Stock Exchange (NYSE). The Bank is expanding
in overseas markets and has the largest international balance sheet among Indian
banks. ICICI Bank now has wholly-owned subsidiaries, branches and representativ
es offices in 19 countries, including an offshore unit in Mumbai. This includes
wholly owned subsidiaries in Canada, Russia and the UK (the subsidiary through w
hich the Hi SAVE savings brand is operated), offshore banking units in Bahrain a
nd Singapore, an advisory branch in Dubai, branches in Belgium, Hong Kong and Sr
i Lanka, and representative offices in Bangladesh, China, Malaysia, Indonesia, S
outh Africa, Thailand, the
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United Arab Emirates and USA. Overseas, the Bank is targeting the NRI (NonReside
nt Indian) population in particular. ICICI reported a 1.15% rise in net profit t
o Rs. 1,014.21 crore on a 1.29% increase in total income to Rs. 9,712.31 crore i
n Q2 September 2008 over Q2 September 2007. The bank s CASA ratio increased to 3
0% in 2008 from 25% in 2007.
Figure 3.5 ICICI BANK
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Data Analysis
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Capital Adequacy Ratio
Table 3.1 CAR
25.00% 20.00% 15.00% 10.00% 5.00% 0.00% HDFC SBI AXIS IDBI ICICI 2005 - 06 2006
- 07 2007 - 08 2008 - 09 2009 - 10
Figure 3.6 CAR
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Reserve Bank of India prescribes Banks to maintain a minimum Capital to riskweig
hted Assets Ratio (CRAR) of 9 percent with regard to credit risk, market risk an
d operational risk on an ongoing basis, as against 8 percent prescribed in Basel
Documents. Capital adequacy ratio of the ICICI Bank was well above the industry
average of 13.97% t. CAR of HDFC bank is below the ratio of ICICI bank. HDFC Ba
nk’s total Capital Adequacy stood at 15.26% as of March 31, 2010. The Bank adopted
the Basel 2 framework as of March 31, 2009 and the CAR computed as per Basel 2
guidelines stands higher against the regulatory minimum of 9.0%. HDFC CAR is gra
dually increased over the last 5 year and the capital adequacy ratio of Axis ban
k is the increasing by every 2 year. SBI has maintained its CAR around in the ra
nge of 11 % to 14 %. But IDBI should reconsider their business as its CAR is fal
ling YOY. Higher the ratio the banks are in a comfortable position to absorb los
ses. So ICICI and HDFC are the strong one to absorb their loses.
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Earning Per Share
Table 3.2 EPS
160.00% 140.00% 120.00% 100.00% 80.00% 60.00% 40.00% 20.00% 0.00% HDFC SBI AXIS
IDBI ICICI 2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10
Figure 3.7 EPS
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Calculating EPS To calculate this ratio, simply divide the company’s net income by
the number of shares outstanding during the same period. If the number of share
s out in the market has changed during that period (ex. a share buyback), a weig
hted average of the quantity of shares is used. Importance of EPS The significan
ce of EPS is obvious, as the viability of any business depends on the income it
can generate. A money losing business will eventually go bankrupt, so the only w
ay for long term survival is to make money. Earnings per share allow us to compa
re different companies’ power to make money. The higher the earnings per share wit
h all else equal, the higher each share should be worth. EPS is often considered
the single most important metric to determine a company’s profitability. It is al
so a major component of another important metric, price per earnings ratio (P/E)
. When we do our analysis, we should look for a positive trend of EPS in order t
o make sure that the company is finding more ways to make more money. Otherwise,
the company is not growing and thus should be considered only if you are confid
ent that it can at least sustain its income. When we do our analysis, we should
look for a positive trend of EPS in order to make sure that the company is findi
ng more ways to make more money. It is clear from the figure 3.7 that SBI tops t
he group so that investors would select SBI to invest. HDFC is also showing the
positive trend over last 5 year. AXIS bank must be attracted by investors as pos
itive growth in EPS is highest among peers who show its ability to generate prof
it for shareholders. ICICI has not any remarkable performances in EPS. There wer
e so many up’s and down in ICICI business performance during economic crises which
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reflected in its EPS. IDBI’s performance is just okay. It’s neither high nor low. ID
BI maintained its EPS but it’s slightly growing.
Net Profit Margin
Net Profit Margin
Table 3.3 NPM
20 2005 - 06 2006 - 07 10 2007 - 08 2008 - 09 5 2009 - 10
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Figure 3.8 NPM
Net Profit margin is a key method of measuring profitability. It can be interpre
ted as the amount of money the company gets to keep for every dollar of revenue.
That is, Net Profit Margin = Net Income ÷ Net Sales. Profit margins can be useful
metrics, but typically require some specific circumstances to really have signi
ficance. Suppose we have Company A from above (15% profit margins) and Company B
(with 20% profit margins). If A and B are in the same industry and, indeed, are
competitors, then B may be a more intelligent investment. If, however, companie
s A and B are not in the same space, then the differences in profit margins may
not be so insightful. Suppose A is in an industry where profit margins are typic
ally less than 10%, and B is in an industry where margins are typically greater
than 25%, then A is probably a higher quality candidate. AXIS bank shown its per
formance in Net Profit Margin as it’s highest among group. HDFC’s NPM is better but
it decreased in first 4 year (2005-09) and then in 2009-10 its rises. SBI is sli
ghtly low as compared to HDFC but its performance is constant. IDBI’s NPM is gradu
ally decreasing; reason is the rise in expenditures and poor performance in econ
omic crisis. ICICI in 2005-06 has second highest NPM (18.43%) but it decreased t
o the only 12 % in 2008-09. ICICI has incurred huge losses in financial crisis b
ut in 200910 it again shows its ability to perform and achieve 15.66%
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Return on Assets
Table 3.4 ROA
1.80% 1.60% 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% HDFC SBI AXIS IDBI I
CICI 2005-06 2006-07 2007 - 08 2008 - 09 2009 - 10
Figure 3.9 ROA
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Return on Assets Where asset turnover tells an investor the total sales for each
$1 of assets, return on assets, or ROA for short, tells an investor how much pr
ofit a company generated for each $1 in assets. The return on assets figure is a
lso a sure-fire way to gauge the asset intensity of a business. ROA measures a c
ompany’s earnings in relation to all of the resources it had at its disposal (the
shareholders’ capital plus short and long-term borrowed funds). Thus, it is the mo
st stringent and excessive test of return to shareholders. If a company has no d
ebt, the return on assets and return on equity figures will be the same. HDFC ha
s shown remarkable ROA over 5 years but AXIS bank will attract more eyes as its
ROA increases for last 5 year. SBI’s ROA is slightly low as compared to HDFC; reas
on is the SBI has highest assets in Indian bank industry that’s why its ROA is low
as compared to AXIS bank and HDFC bank. IDBI is out performed in ROA but ICICI’s
ROA is quite enough to attract investors. Its rise and fall alternatively YOY.
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Credit Deposit Ratio
Table 3.5 Credit Deposit Ratio
300 250 200 150 100 50 0 HDFC SBI AXIS IDBI ICICI
2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10
Figure 3.10 Credit Deposit Ratio
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It is the proportion of loan-assets created by banks from the deposits received.
The higher the ratio, the higher the loan-assets created from deposits. Conside
r Bank X which has deposits worth Rs. 100 crores and a credit-deposit ratio of 6
0 per cent. That means Bank X has used deposits worth Rs. 60 crores to create lo
an-assets. Only Rs. 40 crores is available for other investments. Now, the India
n government is the largest borrower in the domestic credit market. The governme
nt borrows by issuing securities (G-secs) through auctions held by the RBI. Bank
s, thus, lend to the government by investing in these Gsecs. And Bank X has only
Rs. 40 crores to invest in G-secs. If more banks like X have lesser money to in
vest in G-Secs, what will the government do? After all, it needs to raise money
to meet its expenditure. If the money so released is large, ``too much money wil
l chase too few goods in the economy resulting in higher inflation levels. Thi
s would prompt investors to demand higher returns on debt instruments. In other
words, higher interest rates HDFC, SBI and AXIS bank has CDR in equal range from
last 5 year. IDBI has highest CDR all 5 year but good thing is that is graduall
y fall YOY. ICICI bank’s CDR is slightly higher than SBI , AXIS and HDFC but it al
so maintained its CDR YOY.
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Gross Non Performing Assets
Table 3.6 GNPA
4.00% 2007 - 08 2008 - 09 2009 - 10 2.00%
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Figure 3.11 Gross NPA
Gross NPA: Gross NPAs are the sum total of all loan assets that are classified a
s NPAs as per RBI guidelines as on Balance Sheet date. Gross NPA reflects the qu
ality of the loans made by banks. It consists of all the non standard assets lik
e as substandard, doubtful, and loss assets.
It can be calculated with the help of following ratio:
Gross NPAs Ratio Gross Advances
SBI maintained its GNPA to 3% which is very good sign of performances as SBI is
the largest lender in INDIA. HDFC’s GNPA is quite good as it is low with compared
to ICICI and SBI but in 2008-09 GNPA rises. The reason may be economic crises. A
XIS bank has lowest GNPA which shown its management ability. ICICI has the highe
st GNPA in banking industry and rising YOY.
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Net Non Performing Assets
Table 3.7
1.50% 2007 - 08 1.00% 2008 - 09 2009 - 10 0.50%
Figure 3.12 Net NPA
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Net NPA:
Net NPAs are those type of NPAs in which the bank has deducted the provision reg
arding NPAs. Net NPA shows the actual burden of banks. Since in India, bank bala
nce sheets contain a huge amount of NPAs and the process of recovery and write o
ff of loans is very time consuming, the provisions the banks have to make agains
t the NPAs according to the central bank guidelines, are quite significant. That
is why the difference between gross and net NPA is quite high. It can be calcul
ated by following_
Net NPAs =
Gross NPAs – Provisions
Gross Advances - Provisions
AXIS Bank has least Net NPA and ICICI has highest NNPA among group. HDFC shown i
ts management quality as it maintained its NNPA YOY. SBI has to keep NNPA below.
IDBI has successful to control NNPA YOY.
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Findings & conclusion
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Capital adequacy: HDFC BANK has shown best performance in CAR as its gradually r
ising YOY and IDBI’s decreasing YOY. IDBI should reconsider their business tactics
Return on Assets: HDFC tops the group and IDBI again at last but this tie IDBI s
hown consistent performance as compared to ICICI having higher ROA.
Earnings Per Share: SBI’s EPS is highest among group. IDBI has least EPS. Investor
s will choice SBI over all banks and IDBI at last.
Net Profit Margin: AXIS Bank has highest NPM in 2009-10 and rising YOY. IDBI’s NPM
is decreasing YOY.
Credit Deposit Ratio: HDFC maintains its CDR and tops the group. IDBI again on w
orst side but good thing is that it’s decreasing YOY.
Gross NPA: AXIS bank has least GNPA and ICICI has highest among peers.
Net NPA: AXIS Bank again performed better than others and ICICI has maintained i
ts position. SBI has rise in NNPA over the GNPA.
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1) The banks should adapt themselves quickly to the changing norms.
2) The system is getting internationally standardized with the coming of BASELL
II accords so the Indian banks should strengthen internal processes so as to cop
e with the standards. 3) The banks should maintain a 0% NPA by always lending an
d investing or creating quality assets which earn returns by way of interest and
4) The banks should find more avenues to hedge risks as the market is very sensi
tive to risk of any type.
5) Have good appraisal skills, system, and proper follow up to ensure that banks
are above the risk.
Research on which industries are best suited for the use of the CAMELS Framework
. Research on how other variables can be added or how variables can be selected
to suit the industry needs. Research on why the CAMELS Framework can not be used
as a tool of performance evaluation.
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1. Websites: http://www.axi
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