Submitted to: Dr. Vidya Sekhri (Professor and chairperson of Finance)

Submitted by: Ankit Chaturvedi (09254) Saurabh Agrawal (09283) Pawandeep Singh (09275)


We hereby declare that this project work ON “Consumer preferences or perception on Mobile marketing”is our work, carried out under the guidance of our faulty Prof. Sanjay Jain . Our report is neither fully nor partially has ever been submitted for award of any other degree to either this university or any other university.




Performance Appraisal of Banks through Camel framework..

Words are the dress of thoughts, appreciating and acknowledging those who are responsible for the successful completion of the project. Our sincerity gratitude goes to Prof. Sanjau who assigned us responsibility to work on this project and provided us all the help, guidance and encouragement to complete this project. The encouragement and guidance given by Dr. Vidya Sekhri have made this a personally rewarding experience.We thank him for his support and inspiration, without which, understanding the intricacies of the project would have been exponentially difficult. We are sincerely grateful to our friends who provided us with the time and financial assistance and inspiration needed to prepare this training report in congenial manner.





Performance Appraisal of Banks through Camel framework..

S. No. 1.


PAGE NO. 5-6

Executive summary








CAMEL Framework



Literature Review






Data Analysis



Conclusion and Findings










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. Although a complete turnaround in banking sector performance is not expected till the completion of reforms, signs of improvement are visible in some indicators under the CAMEL framework. Under this bank is required to enhance capital adequacy, strengthen asset quality, improve management, increase earnings and reduce sensitivity to various financial risks. The almost simultaneous nature of these developments makes it difficult to disentangle the positive impact of reform measures. Keeping this in mind, signs of improvements and deteriorations are discussed for the three groups of scheduled banks in the following sections. CAMEL Framework Supervisory framework, consistent with international norms, covers risk-monitoring factors for evaluating the performance of banks. This framework involves the analyses of six groups of indicators reflecting the health of financial institutions. The indicators are as follows:  CAPITAL ADEQUACY  ASSET QUALITY  MANAGEMENT SOUNDNESS  EARNINGS & PROFITABILITY  LIQUIDITY The whole banking scenario has changed in the very recent past on the recommendations of Narasimham Committee. Further BASELL II Norms were introduced to internationally standardize processes and make the banking industry more adaptive to the sensitive market risks. 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 Framework 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 banks performance and how this particular model encompasses a wide range of parameters making it a widely used and accepted model in today’s scenario. 6 INSTITUTE OF MANAGEMENT STUDIES - GHAZIABAD

Performance Appraisal of Banks through Camel framework..



Performance analysis of selected banks by investigating individual financial ratios falling under the CAMEL framework. Also comparing top 3 private and public banks and finding out there competent areas and management effectiveness.




Performance Appraisal of Banks through Camel framework..

In 1991, the Indian economy went through a process of economic liberalization, which was followed up by the initiation of fundamental reforms in the banking sector in 1992. The banking reform package was based on the recommendations proposed by the Narsimhan Committee Report (1991) that advocated a move to a more market oriented banking system, which would operate in an environment of prudential regulation and transparent accounting. One of the primary motives behind this drive was to introduce an element of market discipline into the regulatory process that would reinforce the supervisory effort of the Reserve Bank of India (RBI). Market discipline, especially in the financial liberalization phase, reinforces regulatory and supervisory efforts and provides a strong incentive to banks to conduct their business in a prudent and efficient manner and to maintain adequate capital as a cushion against risk exposures. Recognizing that the success of economic reforms was contingent on the success of financial sector reform as well, the government initiated a fundamental banking sector reform package in 1992. Banking sector, the world over, is known for the adoption of multidimensional strategies from time to time with varying degrees of success. Banks are very important for the smooth functioning of financial markets as they serve as repositories of vital financial information and can potentially alleviate the problems created by information asymmetries. From a central bank’s perspective, such high-quality disclosures help the early detection of problems faced by banks in the market and reduce the severity of market disruptions. Consequently, the RBI as part and parcel of the financial sector deregulation, attempted to enhance the transparency of the annual reports of Indian banks by, among other things, introducing stricter income recognition and asset classification rules, enhancing the capital adequacy norms, and by requiring a number of additional disclosures sought by investors to make better cash flow and risk assessments. During the pre economic reforms period, commercial banks & development financial institutions were functioning distinctly, the former specializing in short & medium term financing, while the latter on long term lending & project financing.


Commercial banks were accessing short term low cost funds thru savings investments like current accounts, savings bank accounts & short duration fixed deposits, besides collection float. Development Financial Institutions (DFIs) on the other hand, were essentially depending on budget allocations for long term lending at a concessionary rate of interest. The scenario has changed radically during the post reforms period, with the resolve of the government not to fund the DFIs through budget allocations. DFIs like IDBI, IFCI & ICICI had posted dismal financial results. Infact, their very viability has become a question mark. Now they have taken the route of reverse merger with IDBI bank & ICICI bank thus converting them into the universal banking system.

Major Recommendations by the Narasimham Committee on Banking Sector Reforms
Strengthening Banking System  Capital adequacy requirements should take into account market risks in addition to the credit risks.  In the next three years the entire portfolio of government securities should be marked to market and the schedule for the same announced at the earliest (since announced in the monetary and credit policy for the first half of 1998-99); government and other approved securities which are now subject to a zero risk weight, should have a 5 per cent weight for market risk.  Risk weight on a government guaranteed advance should be the same as for other advances. This should be made prospective from the time the new prescription is put in place.  Foreign exchange open credit limit risks should be integrated into the calculation of risk weighted assets and should carry a 100 per cent risk weight.  Minimum capital to risk assets ratio (CRAR) be increased from the existing 8 per cent to 10 per cent; an intermediate minimum target of 9 per cent be achieved by 10 INSTITUTE OF MANAGEMENT STUDIES - GHAZIABAD

Performance Appraisal of Banks through Camel framework.. 2000 and the ratio of 10 per cent by 2002; RBI to be empowered to raise this further for individual banks if the risk profile warrants such an increase. Individual banks' shortfalls in the CRAR are treated on the same line as adopted for reserve requirements, viz. uniformity across weak and strong banks. There should be penal provisions for banks that do not maintain CRAR.  Public Sector Banks in a position to access the capital market at home or abroad be encouraged, as subscription to bank capital funds cannot be regarded as a priority claim on budgetary resources. Asset Quality  An asset is classified as doubtful if it is in the substandard category for 18 months in the first instance and eventually for 12 months and loss if it has been identified but not written off. These norms should be regarded as the minimum and brought into force in a phased manner.  For evaluating the quality of assets portfolio, advances covered by Government guarantees, which have turned sticky, be treated as NPAs. Exclusion of such advances should be separately shown to facilitate fuller disclosure and greater transparency of operations.  For banks with a high NPA portfolio, two alternative approaches could be adopted. One approach can be that, all loan assets in the doubtful and loss categories should be identified and their realisable value determined. These assets could be transferred to an Assets Reconstruction Company (ARC) which would issue NPA Swap Bonds.  An alternative approach could be to enable the banks in difficulty to issue bonds which could from part of Tier II capital, backed by government guarantee to make these instruments eligible for SLR investment by banks and approved instruments by LIC, GIC and Provident Funds.  The interest subsidy element in credit for the priority sector should be totally eliminated and interest rate on loans under Rs. 2 lakhs should be deregulated for


scheduled commercial banks as has been done in the case of Regional Rural Banks and cooperative credit institutions. Prudential Norms and Disclosure Requirements  In India, income stops accruing when interest or installment of principal is not paid within 180 days, which should be reduced to 90 days in a phased manner by 2002.  Introduction of a general provision of 1 per cent on standard assets in a phased manner be considered by RBI.  As an incentive to make specific provisions, they may be made tax deductible. Systems and Methods in Banks  There should be an independent loan review mechanism especially for large borrowal accounts and systems to identify potential NPAs. Banks may evolve a filtering mechanism by stipulating in-house prudential limits beyond which exposures on single/group borrowers are taken keeping in view their risk profile as revealed through credit rating and other relevant factors.  Banks and FIs should have a system of recruiting skilled manpower from the open market.  Public sector banks should be given flexibility to determined managerial remuneration levels taking into account market trends.  There may be need to redefine the scope of external vigilance and investigation agencies with regard to banking business.  There is need to develop information and control system in several areas like better tracking of spreads, costs and NPSs for higher profitability, , accurate and timely information for strategic decision to Identify and promote profitable products and customers, risk and asset-liability management; and efficient treasury management.



Performance Appraisal of Banks through Camel framework.. Structural Issues  With the conversion of activities between banks and DFIs, the DFIs should, over a period of time convert them to bank. A DFI which converts to bank be given time to face in reserve equipment in respect of its liability to bring it on par with requirement relating to commercial bank.  Mergers of Public Sector Banks should emanate from the management of the banks with the Government as the common shareholder playing a supportive role. Merger should not be seen as a means of bailing out weak banks. Mergers between strong banks/FIs would make for greater economic and commercial sense.  ‘Weak Banks' may be nurtured into healthy units by slowing down on expansion, eschewing high cost funds/borrowings etc.  The minimum share of holding by Government/Reserve Bank in the equity of the nationalised banks and the State Bank should be brought down to 33%. The RBI regulator of the monetary system should not be also the owner of a bank in view of the potential for possible conflict of interest.  There is a need for a reform of the deposit insurance scheme based on CAMELs ratings awarded by RBI to banks.  Inter-bank call and notice money market and inter-bank term money market should be strictly restricted to banks; only exception to be made is primary dealers.  Non-bank parties are provided free access to bill rediscounts, CPs, CDs, Treasury Bills, and MMMF.  RBI should totally withdraw from the primary market in 91 days Treasury Bills.


Bank capital framework sponsored by the world's central banks designed to promote uniformity, make regulatory capital more risk sensitive, and promote enhanced risk management among large, internationally active banking organizations. The International Capital Accord, as it is called, will be fully effective by January 2008 for banks active in international markets. Other banks can choose to "opt in," or they can continue to follow the minimum capital guidelines in the original Basel Accord, finalized in 1988. The revised accord (Basel II) completely overhauls the 1988 Basel Accord and is based on three mutually supporting concepts, or "pillars," of capital adequacy. The first of these pillars is an explicitly defined regulatory capital requirement, a minimum capital-to-asset ratio equal to at least 8% of risk-weighted assets. Second, bank supervisory agencies, such as the Comptroller of the Currency, have authority to adjust capital levels for individual banks above the 8% minimum when necessary. The third supporting pillar calls upon market discipline to supplement reviews by banking agencies. Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. The purpose of Basel II, which was initially published in June 2004, is to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face. Advocates of Basel II believe that such an international standard can help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse. In practice, Basel II attempts to accomplish this by setting up rigorous risk and capital management requirements designed to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices. Generally speaking, these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability.

The final version aims at:



Performance Appraisal of Banks through Camel framework.. 1. Ensuring that capital allocation is more risk sensitive; 2. Separating operational risk from credit risk, and quantifying both; 3. Attempting to align economic and regulatory capital more closely to reduce the scope for regulatory arbitrage. While the final accord has largely addressed the regulatory arbitrage issue, there are still areas where regulatory capital requirements will diverge from the economic. Basel II has largely left unchanged the question of how to actually define bank capital, which diverges from accounting equity in important respects. The Basel I definition, as modified up to the present, remains in place. The Accord in operation


asel II uses a "three pillars" concept – (1) minimum capital requirements (addressing


risk), (2) supervisory review and (3) market discipline – to promote greater stability in the financial system. The Basel I accord dealt with only parts of each of these pillars. For example: with respect to the first Basel II pillar, only one risk, credit risk, was dealt with in a simple manner while market risk was an afterthought; operational risk was not dealt with at all. The First Pillar The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: credit risk, operational risk and market risk. Other risks are not considered fully quantifiable at this stage. The credit risk component can be calculated in three different ways of varying degree of sophistication, namely standardized approach, Foundation IRB and Advanced IRB. IRB stands for "Internal Rating-Based Approach". For operational risk, there are three different approaches - basic indicator approach or BIA, standardized approach or TSA, and advanced measurement approach or AMA. For market risk the preferred approach is VaR (value at risk). As the Basel 2 recommendations are phased in by the banking industry it will move from standardised requirements to more refined and specific requirements that have been developed for each risk category by each individual bank. The upside for banks that do develop their own bespoke risk measurement systems is that they will be rewarded with potentially lower risk capital requirements. In future there will be closer links between the concepts of economic profit and regulatory capital. Credit Risk can be calculated by using one of three approaches 1. Standardized Approach 2. Foundation IRB (Internal Ratings Based) Approach 3. Advanced IRB Approach The standardized approach sets out specific risk weights for certain types of credit risk. The standard risk weight categories are used under Basel 1 and are 0% for short term government bonds, 20% for exposures to OECD Banks, 50% for residential mortgages



Performance Appraisal of Banks through Camel framework.. and 100% weighting on commercial loans. A new 150% rating comes in for borrowers with poor credit ratings. The minimum capital requirement( the percentage of risk weighted assets to be held as capital) remains at 8%. For those Banks that decide to adopt the standardized ratings approach they will be forced to rely on the ratings generated by external agencies. Certain Banks are developing the IRB approach as a result. The Second Pillar The second pillar deals with the regulatory response to the first pillar, giving regulators much improved 'tools' over those available to them under Basel I. It also provides a framework for dealing with all the other risks a bank may face, such as systemic risk, pension risk, concentration risk, strategic risk, reputation risk, liquidity risk and legal risk, which the accord combines under the title of residual risk. It gives banks a power to review their risk management system. The Third Pillar The third pillar greatly increases the disclosures that the bank must make. This is designed to allow the market to have a better picture of the overall risk position of the bank and to allow the counterparties of the bank to price and deal appropriately. The new Basel Accord has its foundation on three mutually reinforcing pillars that allow banks and bank supervisors to evaluate properly the various risks that banks face and realign regulatory capital more closely with underlying risks. The first pillar is compatible with the credit risk, market risk and operational risk. The regulatory capital will be focused on these three risks. The second pillar gives the bank responsibility to exercise the best ways to manage the risk specific to that bank. Concurrently, it also casts responsibility on the supervisors to review and validate banks’ risk measurement models. The third pillar on market discipline is used to leverage the influence that other market players can bring. This is aimed at improving the transparency in banks and improves reporting.


During an on-site bank exam, supervisors gather private information, such as details on problem loans, with which to evaluate a bank's financial condition and to monitor its compliance with laws and regulatory policies. A key product of such an exam is a supervisory rating of the bank's overall condition, commonly referred to as a CAMELS rating. This rating system is used by the three federal banking supervisors (the Federal Reserve, the FDIC, and the OCC) and other financial supervisory agencies to provide a convenient summary of bank conditions at the time of an exam. The acronym "CAMEL" refers to the five components of a bank's condition that are assessed: Capital adequacy, Asset quality, Management, Earnings, and Liquidity. A sixth component, a bank's Sensitivity to market risk , was added in 1997; hence the acronym was changed to CAMELS. (Note that the bulk of the academic literature is based on pre1997 data and is thus based on CAMEL ratings.) Ratings are assigned for each component in addition to the overall rating of a bank's financial condition. The ratings are assigned on a scale from 1 to 5. Banks with ratings of 1 or 2 are considered to present few, if any, supervisory concerns, while banks with ratings of 3, 4, or 5 present moderate to extreme degrees of supervisory concern. In 1994, the RBI established the Board of Financial Supervision (BFS), which operates as a unit of the RBI. The entire supervisory mechanism was realigned to suit the changing needs of a strong and stable financial system. The supervisory jurisdiction of the BFS was slowly extended to the entire financial system barring the capital market institutions and the insurance sector. Its mandate is to strengthen supervision of the financial system by integrating oversight of the activities of financial services firms. The BFS has also established a sub-committee to routinely examine auditing practices, quality, and coverage. In addition to the normal on-site inspections, Reserve Bank of India also conducts off-site surveillance which particularly focuses on the risk profile of the supervised entity. The Off-site Monitoring and Surveillance System (OSMOS) was introduced in 1995 as an additional tool for supervision of commercial banks. It was introduced with the aim to supplement the on-site inspections. Under off-site system, 12 returns (called DSB 18 INSTITUTE OF MANAGEMENT STUDIES - GHAZIABAD

Performance Appraisal of Banks through Camel framework.. returns) are called from the financial institutions, which focus on supervisory concerns such as capital adequacy, asset quality, large credits and concentrations, connected lending, earnings and risk exposures (viz. currency, liquidity and interest rate risks). In 1995, RBI had set up a working group under the chairmanship of Shri S. Padmanabhan to review the banking supervision system. The Committee certain recommendations and based on such suggestions a rating system for domestic and foreign banks based on the international CAMEL model combining financial management and systems and control elements was introduced for the inspection cycle commencing from July 1998. It recommended that the banks should be rated on a five-point scale (A to E) based on the lines of international CAMEL rating model. All exam materials are highly confidential, including the CAMEL. A bank's CAMEL rating is directly known only by the bank's senior management and the appropriate supervisory staff. CAMEL ratings are never released by supervisory agencies, even on a lagged basis. While exam results are confidential, the public may infer such supervisory information on bank conditions based on subsequent bank actions or specific disclosures. Overall, the private supervisory information gathered during a bank exam is not disclosed to the public by supervisors, although studies show that it does filter into the financial markets. CAMEL ratings in the supervisory monitoring of banks Several academic studies have examined whether and to what extent private supervisory information is useful in the supervisory monitoring of banks. With respect to predicting bank failure, Barker and Holdsworth (1993) find evidence that CAMEL ratings are useful, even after controlling for a wide range of publicly available information about the condition and performance of banks. Cole and Gunther (1998) examine a similar question and find that although CAMEL ratings contain useful information, it decays quickly. For the period between 1988 and 1992, they find that a statistical model using publicly available financial data is a better indicator of bank failure than CAMEL ratings that are more than two quarters old. Hirtle and Lopez (1999) examine the usefulness of past CAMEL ratings in assessing banks' current conditions. They find that, conditional on current public information, the private supervisory information contained in past CAMEL ratings provides further


insight into bank current conditions, as summarized by current CAMEL ratings. The authors find that, over the period from 1989 to 1995, the private supervisory information gathered during the last on-site exam remains useful with respect to the current condition of a bank for up to 6 to 12 quarters (or 1.5 to 3 years). The overall conclusion drawn from academic studies is that private supervisory information, as summarized by CAMEL ratings, is clearly useful in the supervisory monitoring of bank conditions. CAMEL ratings in the public monitoring of banks Another approach to examining the value of private supervisory information is to examine its impact on the market prices of bank securities. Market prices are generally assumed to incorporate all available public information. Thus, if private supervisory information were found to affect market prices, it must also be of value to the public monitoring of banks. Such private information could be especially useful to financial market participants, given the informational asymmetries in the commercial banking industry. Since banks fund projects not readily financed in public capital markets, outside monitors should find it difficult to completely assess banks' financial conditions. In fact, Morgan (1998) finds that rating agencies disagree more about banks than about other types of firms. As a result, supervisors with direct access to private bank information could generate additional information useful to the financial markets, at least by certifying that a bank's financial condition is accurately reported. The direct public beneficiaries of private supervisory information, such as that contained in CAMEL ratings, would be depositors and holders of banks' securities. Small depositors are protected from possible bank default by FDIC insurance, which probably explains the finding by Gilbert and Vaughn (1998) that the public announcement of supervisory enforcement actions, such as prohibitions on paying dividends, did not cause deposit runoffs or dramatic increases in the rates paid on deposits at the affected banks. However, uninsured depositors could be expected to respond more strongly to such information. Jordan, et al., (1999) find that uninsured deposits at banks that are subjects of publiclyannounced enforcement actions, such as cease-and-desist orders, decline during the quarter after the announcement.



Performance Appraisal of Banks through Camel framework.. The holders of commercial bank debt, especially subordinated debt, should have the most in common with supervisors, since both are more concerned with banks' default probabilities (i.e., downside risk). As of year-end 1998, bank holding companies (BHCs) had roughly $120 billion in outstanding subordinated debt. DeYoung, et al., (1998) examine whether private supervisory information would be useful in pricing the subordinated debt of large BHCs. The authors use an econometric technique that estimates the private information component of the CAMEL ratings for the BHCs' lead banks and regresses it onto subordinated bond prices. They conclude that this aspect of CAMEL ratings adds significant explanatory power to the regression after controlling for publicly available financial information and that it appears to be incorporated into bond prices about six months after an exam. Furthermore, they find that supervisors are more likely to uncover unfavorable private information, which is consistent with managers' incentives to publicize positive information while de-emphasizing negative information. These results indicate that supervisors can generate useful information about banks, even if those banks already are monitored by private investors and rating agencies. The market for bank equity, which is about eight times larger than that for bank subordinated debt, was valued at more than $910 billion at year-end 1998. Thus, the academic literature on the extent to which private supervisory information affects stock prices is more extensive. For example, Jordan, et al., (1999) find that the stock market views the announcement of formal enforcement actions as informative. That is, such announcements are associated with large negative stock returns for the affected banks. This result holds especially for banks that had not previously manifested serious problems. Focusing specifically on CAMEL ratings, Berger and Davies (1998) use event study methodology to examine the behavior of BHC stock prices in the eight-week period following an exam of its lead bank. They conclude that CAMEL downgrades reveal unfavorable private information about bank conditions to the stock market. This information may reach the public in several ways, such as through bank financial statements made after a downgrade. These results suggest that bank management may reveal favorable private information in advance, while supervisors in effect force the release of unfavorable information.


Berger, Davies, and Flannery (1998) extend this analysis by examining whether the information about BHC conditions gathered by supervisors is different from that used by the financial markets. They find that assessments by supervisors and rating agencies are complementary but different from those by the stock market. The authors attribute this difference to the fact that supervisors and rating agencies, as representatives of debtholders, are more interested in default probabilities than the stock market, which focuses on future revenues and profitability. This rationale also could explain the authors' finding that supervisory assessments are much less accurate than market assessments of banks' future performances.

Performance Ratios For Camel Framework Capital adequacy Capital adequacy provides fortification for the depositors from the potentials shocks of losses that a bent might incur and promote the stability in banking system. It helps in absorbing major financial risk like the creditors market risk, foreign exchange risk, interest rate risk and the risk operates in off balance sheet operations. So, it reflects the ability of the bank to absorb the unanticipated shocks. Capital adequacy of any financial institution is instrumental in the formation of risk perception among its stakeholders. Capital adequacy can be measured through the following ratios: a. Capital assets ratio: It can be evaluated by dividing the banks capital which is contributed by the onus of the bank by its total assets. The higher the capital assets ratio the higher the quality of the capital employed. b. Debt-equity ratio: Debt equity ratio can be calculated by dividing the debt (borrowing and deposits) upon equity (capital plus reserves and surplus). It indicates the degree of leverage of the bank and measures how much of the bank business is financed through equity. A higher ratio reflects less protection for the creditors and depositors of the bank.



Performance Appraisal of Banks through Camel framework.. c. Advances to total assets: It reflects the aggressiveness of the bank in lending the funds. The higher value of this ratio means there are more advances as a portion of total assets. d. G-Gecs (Government securities) to total investment: It measures the risktaking ability of the bank. Since the government securities are risk-free, the higher the investment in G-Securities, the lower value the risk involve in the bank investment. Assets quality: The quality of assets is an important parameter to gauge the strength of any banking institution, as the quality of its assets has a major bearing on the earning ability of that institution. This reflects the extent of credit-risk and recovering the bank debt. It can be computed as follows: a. Net NPA (non-performing assets) to total assets: It is arrived at by dividing the net NPA by total assets. The lower the better quality of assets. b. Net NPA to advances: It is computed by dividing by net NPA by advances. The higher level of investment means lack off-take and that the bank choose other avenues, such as government securities and other approved securities to park their funds. c. Total earning assets to total assets: It indicates the extent of development of assets invested as against the advances. The higher level of investment means lack of credit off-take and that the banks choose other avenues, such as government securities and other approved securities and other approved securities to park their funds. d. Total earning assets to total assets: It is calculated by dividing the amount of total earning assets (advances plus investment) by the amount of total assets. The higher of its value shows the strength of the earning base of the bank. Management efficiency Management efficiency is the most critical element that ensures the survival and growth of the bank.


It is measured as follows: a. Total advances to total deposits: It measures the efficiency of the management in converting the available deposits into advances. The efficiency is positively related to the value of the ratio. b. Business per employee: It measures the quality of the bank’s employee in generating business. It is calculated by dividing the total business (total advances and total deposit) by the total number of employees. The higher value of this ratio entails higher efficiency in the management. c. Operating expenses to total income: It is arrived at by dividing operating expenses to the total income. The higher value of the ratio adversely affects the measure of the management quality in the bank. d. Total expenses to total income: It is arrived at by dividing the total expenses by the total income. The lower value of this ratio is considered better for the management. Earnings quality While the quality earning add profit, losses results in the erosion of the capital base of a bank. The earnings quality is usually measured as follows: a. Interest income to total income: It measures the interest income as a percentage of the total income. The greater value of this ratio implies more earnings of the bank from lending and larger interest rate risk. b. Non- interest income to total income: It measures the non-interest income as a percentage of the total income. The more of it is taken as to lower the chances of interest rate risk and more diversification in earning sources. c. Operating profit to total assets: It is arrived at by dividing the operating profit by total asset. The earning quality of the bank is directly proportional to this ratio. d. Net interest margin: It is computed by dividing the net interest income to the total earning assets (advances plus investment). The higher value of this ratio is taken as one of the indicators of earning quality of the bank.



Performance Appraisal of Banks through Camel framework.. Liquidity position Liquidity is very important for any financial institution. While a bank has to take proper care about the liquidity risk, high funds invested in high-return portfolio yield high profitability for the bank. Thus, any bank generates profit on a reasonable level of liquidity position can be measured as follows: a. Liquid assets to total deposit: It indicates the bank’s ability to meet the customer’s deposit in a particular year. Liquid assets include cash in hand, balance with RBI and other banks (both in India and abroad) the higher value of the ratio implies the better liquidity of the bank b. Money at call and short notice to deposits: It shows the money at call and short notice in a particular year as a portion of total assets. The more of this ratio indicates a comfortable position of liquidity of the bank. c. Cash to deposits: It measures the cash in hand at the bank in a particular year in relation to the deposits of the customers. The greater the value of this ratio makes the bank less stressful on the liquidity front. d. Balance with RBI to deposit: In banking, the balances of the commercial banks with central bank are considered as a safe assets and may be converted into cash with least cost. The more of this proportion implies better liquidity position of the bank.


LITERATURE REVIEW Keshar J. Baral (2005) The data set published by joint venture banks in their annual reports, and NRB in its supervision annual reports, this paper examines the financial health of joint venture banks in the CAMEL framework. The health checks up conducted on the basis of publicly available financial data concludes that the health of joint venture banks is better than that of the other commercial banks. Bousaid and Saucier (2003) They used Camel ratings on Japanese Banks for the period 1993 to 1999 and found that CAMEL framework had the capacity to predict and explain the distress. The study revealed that the major problem of failed Bank was not of the inefficiency of management, but the below standard capital adequacy and considerable problems in their assets quality. Cole and Gunther (1998) They found that new ( Less than 6 months old ) CAMEL rating more accurately predicted the Bank financial distress than what the financial ratios can, but that financial ratios were better predictors than the older ( more than 6 months old) CAMEL ratings.



Performance Appraisal of Banks through Camel framework.. METHODOLOGIES Research Design: Exploratory research Sample Unit: In this research three public sector banks and three private sector banks operating in India have been taken.  SBI  IDBI  PNB  ICICI  HDFC  AXIS Sample Size: The sample size is of 6 banks Data Collection: We have used the secondary data published by the reserve bank of India, the PROWESS database and annual reports. Tools Used: The study is entirely based on the CAMEL framework. The financial performance of bank in this framework is concentrated in five components: Capital adequacy, asset quality, management efficiency, earning quality and liquidity position.



INDICATORS OF CAPITAL ADEQUACY RATIO Capital-assets ratio YEAR 2008 2009 2010 Average 2008 2009 2010 Average 2008 2009 2010 Average 2008 2009 2010 Average SBI 0.0009 0.0007 0.0006 0.002 12.65 14.26 13.75 13.55 0.58 0.56 0.60 0.58 0.74 0.82 0.80 0.79 IDBI 0.006 0.004 0/003 0.004 1.91 16.64 21.19 13.25 0.63 0.60 0.59 0.61 0.71 0.81 0.83 0.78 PNB 0.002 0.001 0.001 0.001 14.46 15.16 15.16 14.93 0.60 0.63 0.63 0.62 0.82 0.86 0.85 0.84 ICICI 0.003 0.003 0.002 0.003 7.07 6.24 5.70 6.33 0.46 0.45 0.37 0.43 0.68 0.62 0.57 0.62 HDFC 0.003 0.002 0.002 0.002 9.45 10.40 8.38 9.41 0.48 0.54 0.57 0.53 0.65 0.93 0.94 0.84 AXIS 0.003 0.002 0.002 0.002 10.63 25.33 9.88 15.28 0.54 0.55 0.58 0.56 0.60 0.61 0.61 0.61

Debt-equity ratio

Advances-total asset ratio

G-sec- total investment ratio



Performance Appraisal of Banks through Camel framework..

Inferences: As per Basel – 2 Accord every Banks have to maintain a minimum Capital adequacy of 12%. The higher the capital in relation to the total assets, the stronger is the Bank. The major indicator of capital adequacy is shown in a Table: During the study period (2008-2010), reveals that Capital assets ratio of IDBI Bank with an average of 0.004 evidenced stronger Capital base than all the other banks. PNB is having the lowest Capital base with an average of 0.001. Axis Bank is having the highest Debt equity ratio with an average of 15.28 it may be due to their high Deposits from the domestic market & perhaps due to high borrowing from the Financial market. It indicates that how much Bank business is financed through Debt & how much through equity. A higher ratio reflects less protection for the creditors & depositors of the Bank. ICICI Bank is having low Debt – equity ratio with an average of 6.33 because it can be of less deposit & of less borrowing. The advances to total assets ratio indicates the aggressiveness of a Bank in lending. The Advances to total assets ratio of PNB Bank is highest with an average of 0.68 The higher Value of the ratio indicates that bankers are having more Advances as a portion of total Assets. The investment in a Government Securities is considered as a risk free investment which carries lowest return & reflects the quality of the invested assets. The PNB & HDFC Bank is having highest investment in government securities, so it’s indicate that


INDICATOR OF ASSET QUALITY RATIO NNPA-Total Asset YEAR 2008 2009 2010 Average 2008 2009 2010 Average 2008 2009 2010 Average 2008 2009 2010 Average SBI 0.01 0.01 0.01 0.01 0.02 0.02 0.02 0.02 0.26 0.29 0.27 0.27 0.84 0.85 0.87 0.85 IDBI 0.008 0.005 0.004 0.006 0.013 0.009 0.008 0.01 0.25 0.29 0.31 0.29 0.88 0.89 0.91 0.89 PNB 0.004 0.001 0.003 0.003 0.006 0.002 0.005 0.004 0.27 0.26 0.26 0.26 0.87 0.88 0.89 0.88 ICICI 0.007 0.01 0.01 0.008 0.02 0.02 0.02 0.02 0.23 0.21 0.25 0.23 0.70 0.67 0.62 0.66 HDFC 0.002 0.003 0.002 0.002 0.005 0.006 0.005 0.005 0.37 0.31 0.25 0.31 0.84 0.84 0.81 AXIS 0.002 0.006 0.007 0.005 0.004 0.011 0.012 0.009 0.31 0.32 0.31 0.31 0.68 0.90 0.61 0.83


Total investment-Total Asset

Total Earning Asset- Total Assets



Performance Appraisal of Banks through Camel framework.. Inferences :The quality of assets is an important parameter to gauge the strength of banking institution as a quality of its assets has a major bearing on the earning ability of that institution. This reflects the extent of credit-risk and recovering the bank debt. HDFC Bank is strongly managing its Non- performing assets within the average ratio of 0.002 SBI Bank is having highest non- performing assets out of its total assets. IDBI Bank is achieving an lowest ratio of Advances out of its total advances on a other hand AXIS Bank is having a largest ratio of Advances. The lower volume of this ratio signifies the improved quality of advances. Among all the groups of Banks, HDFC & AXIS Bank were the top performers, with an average ratio of 0.31 .

INDICATORS OF MANAGEMENT EFFICIENCY RATIO Total advance-Total deposit YEAR 2008 2009 2010 Average 2008 2009 2010 Average 2008 2009 2010 Average 2008 2009 2010 Average SBI 0.58 0.56 0.60 0.58 3.82 4.59 4.79 4.40 0.25 0.24 0.29 0.26 0.88 0.88 0.89 0.89 IDBI 0.63 0.60 0.60 0.61 17.27 22.89 29.10 23.38 0.11 0.11 0.12 0.11 0.93 0.94 0.94 0.93 PNB 0.60 0.63 0.63 0.62 5.90 6.54 6.35 6.25 0.24 0.22 0.23 0.23 0.87 0.86 0.84 0.86 ICICI 0.46 0.45 0.37 0.43 19.59 14.09 10.95 14.87 0.27 0.27 0.30 0.27 0.90 0.91 0.88 0.90 HDFC 0.48 0.54 0.57 0.53 5.13 6.53 5.65 5.77 0.30 0.28 0.29 0.29 0.87 0.89 0.85 0.87 AXIS 0.54 0.55 0.58 0.56 11 12.11 12.16 11.76 0.26 0.21 0.24 0.24 0.88 0.87 0.84 0.86

Business per employee (in crore) Operating expense-Total Income Total expenses- total income


INFERENCE: Total advance to total deposits:- It indicates or measures efficiency of the management in converting the available deposits into advances. The efficiency is positively related to the value of the ratio. From last 3 year's 2007-08, 2008-09 and 2009-10, Punjab national bank showing highest value in total advance to total deposits which is .62 than .61 by IDBI who is very close to PNB. Hence, this shows efficiency of punjab national bank & IDBI is very high, they are very competent in converting the available deposits into advances. On other hand, ICICI is least effective in converting deposits into advances. Business per employee:- It measures the quality of the bank's employees in generating business. It is calculated by dividing the total business(total advances and total deposit) by the total number of employees. The higher value of the ratio entails higher efficiency in the management. From Last 3 year's 2007-08, 2008-09 and 2009-10, IDBI has most efficient management in generating business with highest value with 23.38, than ICICI with 14.87 & AXIS bank 11.76. On the other hand, SBI management efficiency is least effective in generating business with lowest value 4.40. Operating expenses to Total income: In this the higher the value of the ratio adversely affects the measure of the management quality in the bank.



Performance Appraisal of Banks through Camel framework.. From Last 3 year's 2007-08, 2008-09 and 2009-10, HDFC and ICICI showing adverse management quality with highest value's .29 & .27. On the other hand, IDBI with lowest value showing they possess best management quality. Total expenses to total income: In this the lower the value of the ratio is considered better for the management. From Last 3 year's 2007-08, 2008-09 and 2009-10, PNB and AXIS bank is better for the management as they have lowest value in total expenses to total income which is .86 in both the cases. ICICI and IDBI has a highest value this shows they have poor management system which is .93 and .90.

INDICATORS OF EARNINGS QUALITY RATIO Interest income-Total income YEAR 2008 2009 2010 Average 2008 2009 2010 Average 2008 2009 2010 Average 2008 2009 2010 Average SBI 0.84 0.83 0.82 0.83 0.16 0.17 0.18 0.17 0.03 0.03 0.03 0.02 0.08 0.08 0.08 0.08 IDBI 0.80 0.87 0.87 0.85 0.20 0.13 0.13 0.15 0.11 0.11 0.12 0.11 0.07 0.07 0.07 0.07 PNB 0.88 0.85 0.86 0.86 0.12 0.15 0.14 0.14 0.02 0.02 0.02 0.02 0.08 0.09 0.08 0.08 ICICI 0.78 0.79 0.78 0.78 0.22 0.21 0.22 0.22 0.02 0.02 0.02 0.02 0.09 0.10 0.09 0.09 HDFC 0.80 0.81 0.78 0.80 0.20 0.19 0.21 0.20 0.03 0.03 0.03 0.30 0.09 0.10 0.09 0.09 AXIS 0.30 0.27 0.32 0.30 0.70 0.73 0.68 0.70 0.02 0.03 0.03 0.02 0.03 0.03 0.05 0.04

Non-interest income-Total income Operating profit-Total assets

Net Interest Margin


INFERENCE: In case of ratio of interest income to total income, PNB has the highest interest income in proportion to total income of 0.86. Interest income forms the major part in every bank. There can we seen slight decline in the interest income to total income ratio of SBI, PNB, ICICI and AXIS bank this may be because of now banks are very bullish towards investment in capital market and funds are being invested there too, in order to derive more income from dividend and market fluctuations. The non-interest income to total income indicates fee income and less default risk. On this parameter AXIS bank has the highest non-interest income in comparison with other banks. The government sector banks have the lowest non-interest income in relation to private banks. SBI, PNB and IDBI have a ratio of 0.17, 0.15, 0.14 respectively. The ratio of operating profit to total assets measures the effectiveness of the bank in employing its working funds to generate profit. On this parameter HDFC bank have been in the top with a ratio on 0.30 followed by IDBI with 0.11 n then SBI, ICICI, AXIS and PNB have a very low operating profit in relation to there assets. The net interest margin reflects the ability of the banks to generate income from their total earning assets. In this respect, ICICI and HDFC have a high net interest margin in comparison with SBI and other banks. This is because of the better asset-liability management in the private banks. AXIS bank has low margin because of low interest income.



Performance Appraisal of Banks through Camel framework.. INDICATORS OF LIQUIDITY YEAR SBI IDBI PNB 2008 0.22 0.21 0.20 2009 0.22 0.18 0.18 2010 0.20 0.17 0.17 Average 0.21 0.19 0.19 2008 0.03 0.03 0.02 2009 0.07 0.02 0.02 2010 0.04 0.004 0.02 Average 0.05 0.02 0.02 2008 0.13 0.12 0.11 2009 0.14 0.10 0.10 2010 0.12 0.09 0.09 Average 0.13 0.10 0.10 2008 0.10 0.09 0.09 2009 0.07 0.08 0.08 2010 0.08 0.08 0.07 Average 0.08 0.08 0.08

RATIO Liquid asset-Total deposits

Money at call and short notice to Total assets Cash – Total Deposits

Balance with RBI- Total deposits

ICICI 0.22 0.22 0.33 0.25 0.04 0.06 0.06 0.05 0.16 0.14 0.19 0.16 0.06 0.08 0.14 0.09

HDFC 0.27 0.22 0.27 0.25 0.09 0.03 0.09 0.07 0.15 0.12 0.18 0.15 0.12 0.09 0.09 0.10

AXIS 0.23 0.21 0.17 0.20 0.06 0.05 0.04 0.05 0.14 0.13 0.11 0.13 0.08 0.08 0.07 0.08


INFERENCE:As shown in the above table, for liquid assets- total deposit ratio, HDFC and ICICI has the highest liquidity with a average ratio of 0.25, doing relatively well in meeting the customer demand. It is further followed by SBI with a ratio of 0.21. IDBI and PNB are on the same footing with a ratio of 0.19. It is also seen that liquidity has been in decreasing trend majorly because of the larger demand of bank credit due to accelerated economic activity. For money at call and short notice to total assets, HDFC has the higher liquidity with a ratio of 0.07 in relation to other banks .SBI, ICICI and AXIS is on equal footing in relation to money at call and short notice in proportion to total assets. The lowest ratio is of IDBI and PNB with 0.02. In case of cash to deposit ratio, ICICI has the highest cash in proportion to deposits. Holding the cash is considered as an idle asset for any institution. Liquidity position is good but it can lose opportunity cost of return on alternative assets that can be easily converted into liquid asset. In ratio of bank balance with the RBI to deposits, HDFC holds the highest exposure in proportion to deposit, rest all other banks i.e. SBI, PNB, IDBI and AXIS have the same ratio of 0.08. Balance with RBI is considered as cash-equivalent, so banks having more balance with RBI are better in relation to liquidity.



Performance Appraisal of Banks through Camel framework..

Capital adequacy: The capital adequacy ratio of all the six banks is above the minimum requirements and above the industry average. Assets: NPA of HDFC and SBI bank have been almost at same level during 2008-2010. There has been considerably decline in the NPAs of ICICI, IDBI and PNB, but AXIS bank’s NPAs have increased. Management: Professional approach that has been adopted by the banks in the recent past is in right direction & also it is the right decision. Business per employee has seen a drastic increase on year-to-year basis for all the six banks. Earnings: Income from interest is quite high for every bank except AXIS bank which has more noninterest income. Overall earning of the banks have been a good level as there interest margins are quite good. Liquidity: Banks should maintain quality securities with good liquidity to meet contingencies. HDFC and ICICI Bank is fulfilling this requirement by maintaining highest liquid assetto deposit ratio. Cash and deposits with bank are also indicating strong liquidity position of the banks.


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 cope with the standards. 3) The banks should maintain a 0% NPA by always lending and investing or creating quality assets which earn returns by way of interest and profits. 4) The banks should find more avenues to hedge risks as the market is very sensitive to risk of any type. 5) Have good appraisal skills, system, and proper follow up to ensure that banks are above the risk.



Performance Appraisal of Banks through Camel framework..

Bibliography Books: Kothari, C.R., “Research Methodology: Methods and Techniques”, Wishwa Publication, Delhi Ved Pal and Praveen Chauhan,(2009) by NICE Journal of Business, (Vol. 4) Websites Reference:
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