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3 Introduction to Banking BBA 338 ATFE 2016

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10 CHAPTER : MANAGEMENT OF COMMERCIAL BANKS

CAMEL RATING : A COMPREHENSIVE CRITERIA

The performance of the scheduled banks in Bangladesh are evaluated by the Central Bank on
the basis of a criteria called ‘CAMEL Rating’. The work ‘CAMEL’ is the combination of the first
letters of some important performance indicators of a bank. These are as follows:
C = Capital, A = Asset, M = Management, E = Earnings and L = Liquidity
1. Capital Adequacy: In case of capital, a bank is required to maintain as per Bangladesh Bank
directive, adequate capital (capital adequacy ratio) which is currently equivalent to 9
percent of its risk weighted assets. This requirement has two components, namely: (a)
Adequate Capital and (b) Quality of Assets.
2. Asset Quality: A bank needs to maintain quality of its assets i.e. advances because solvency
risk of a financial institution often originates from the quality of its assets. That is why a
ratio of non-performing assets to total loans is calculated to find out the quality of assets.
3. Management Soundness: A bank’s financial position and strength are also dependent on
the efficiency of management. But it is very difficult to quantify management efficiency in
monetary terms. Despite that some ratios give some indications about the management
efficiency. These are: (a) Total Expenditure to Total Income, (b) Operating Expenses to Total
Expenses, (c) Earnings and Operating Expenses Per Employee and (d) Interest Spread.
4. Earnings and Profitability: To survive and flourish, a bank must have the ability to: (a)
Conduct Present Operations and Support Future Ones, (b) Absorb Losses, (c) Build Up
Capital and Provision Base, (d) Finance Expansion and Finally and (e) Pay Dividend. It is
needless to say that all these depend on earnings and profits.
5. Liquidity: Liquidity is a very important criteria for judging the rating of a bank. A bank is
required by the Central Bank currently to maintain liquid assets (Cash in Tills + Treasury Bills
+ Other Approved Securities) equivalent to 16 percent of its deposit liabilities.

 Categorization of Banks on CAMEL Basis

The Central Bank uses the CAMEL rating on regular basis to evaluate the performance of
the scheduled banks. Based on such rating, they classify the banks into five categories:
 Strong Rating [R1]
 Satisfactory [R2]
 Fair [R3]
 Marginal [R4]
 Unsatisfactory [R5]
The banks rated as ‘Satisfactory’ and ‘Fair’ are encouraged to be ‘Strong’. On the other
hand, the banks identified as ‘Marginal’ are closely watched for further improvement.
The banks under ‘Unsatisfactory’ category are called ‘Problem banks’. Such banks are
subject to strict supervision by the Central Bank. They monitor their performance on
day-to-day basis.