CAMELS Rating system

The rating system where in the bank regulators (State Bank of Pakistan) or
examining bodies evaluate the overall performance of the banks & Financial
institutions to determine their strengths and weaknesses.
Based on the financial statement of banks and onsite inspection by State
bank of Pakistan.
Overall financial position of banks evaluated and corrective actions taken
accordingly.
Financial statement basically includes two statements:
i. Profit and Loss Account (Income statement)
ii. Balance sheet

 On site examination is conducted by SBP nominated teams.

 The camels rating system is based on six parameters.
 Score scale from 1 to 5
1 is for best
2-3 average
4-5 worst (corrective action required)
Six parameters of CAMELS Rating

1. Capital Adequacy
2. Assets Quality
3. Management Quality
4. Earnings
5. Liquidity
6. Sensitivity
Capital Adequacy
Amount of capital that banks and financial institutions holds in order to
meet Central Bank (SBP) requirement.
Capital Adequacy Ratio (CAR) = (Banks capital / Risk Weighted Assets) ×100
This ratio is used to protect depositors and investors and to ensure financial
soundness of Banks.
Bank Capital is divided into two categories which are labelled as tier 1 and
teir2.
Tier 1 Capital:
Equity Share Capital
Statutory Reserve
Security premium
Capital Reserve realized in cash
Other free reserve
Tier 2 Capital:
Convertible Preference share
Capital reserve not realized
Revaluation reserve
Risk Weighted assets
Assets Quality
Assets includes current and fixed assets i.e cash, loans, Government
securities investment etc.
It measures bank’s effectiveness in controlling and monitoring risk.

= Gross NPA / Gross Advances

NPA is non-performing assets which interest or principal is 90 days overdue.
Management
 Bank understanding of financial stress.
 Management capability to identify measures and control risk. Policies
and guidelines for risk management.
 How management respond to Changes in market conditions like
interest rate changes, forex rate changes.
 Delegation of duties and responsibilities. How Director and top
management has delegated authorities and responsibilities towards
middle and lower level management.
 Bank’s compensation policies
Earning
Income from all operations of bank. How bank is using its deployed assets
for generating incomes. It is measured through ROA ratio which is
calculated as = Net income/ total assets

Liquidity
Banks ability to converts its assets to cash. Cash maintained by banks as
cash and reserves with central bank.
=SLR/ TA (statutory Liquidity ration)
Or
= Cash with SBP / total assets ( Capital Reserve Ratio)
SLR or CCR is maintained to meet withdrawal demands of customer.

Sensitivity
How sensitive bank is to market risk or sensitivity towards changing
market condition.
Factors weightage
C 20%, A 20 %, M 25 %, E 15%, L 10%, S 10%