CAMEL framework for

Banks
CAMEL
Capital Adequacy
Asset quality
Management
Earnings
Liquidity
CAMEL….
• Under the CAMEL framework, banks are required to
Enhance Capital adequacy
Strengthen Asset quality
Improve Management
Increase earnings
Reduce sensitivity to financial risks
Capital Adequacy

• It reflects the overall financial condition of the banks and also the
ability of the management to meet the need for additional capital.
• It reflects the leverage the bank enjoys as it has to take the
advantage of lucrative investment opportunities that may come up in
future as well as to withstand unexpected adversity
Capital Adequacy….

• Banks in the modern world face an inherent risk of insolvency. Since

the banks are so highly leveraged, there could be a run on the bank
any moment if their reserves are considered to be inadequate by the
market.
• Hence, banks must maintain adequate capital if they want to survive.
However, what constitutes “adequate” is subjective. This is generally
measured in the form of a “capital adequacy ratio”
Capital Adequacy- parameters

• Capital adequacy ratio (CAR) is a ratio of a bank’s capital to its risk

weighted assets.
• CAR is the ratio which determines the capacity of the bank in terms
of meeting the time liabilities and other risks, such as credit risk,
operational risk, and market risk .
• A bank’s capital is the ‘cushion’ for potential losses, which protects
the bank’s depositors or other lenders.
• CAR prescribed by RBI is 12.1% for PSU banks
• CAR = ( Tier I +Tier II capital) / Risk weighted assets
Tier I & II capital
TIER I TIER II
Paid up capital Undisclosed reserves
Perpetual non cumulative preference shares Revaluation reserves
Innovative perpetual debt instrument General provisions
Capital reserves arising out of sale proceeds of assets Hybrid debt capital instruments
Subordinated debt
Investment reserve account
 Risk weighted assets
ASSET RISK WEIGHT %
Cash, balance with RBI 0
Balance in current account with other banks 20
Investment in government securities 0
Other investments 100
Loans & advances guaranteed by government 0
Other loans & advances 100
Bank premises, furniture 100
All Off balance sheet items like LCs etc 100
Non funded exposure to Real estate 150

A bank with a higher CAR is less likely to become insolvent if unexpected losses occur.
Capital Adequacy- parameters

• Debt–Equity (D/E) Ratio: It is arrived by dividing the total borrowing

and deposits by the net-worth, which includes equity capital, reserves
and surplus. It shows leverage of the bank.
• Lesser the D/E ratio, stronger the bank
• https://www.financialexpress.com/industry/banking-finance/banks-ca
pital-adequacy-ratio-may-fall-to-13-3-in-a-baseline-scenario-rbi-repor
t/2034343
/

• https://
www.kotaksecurities.com/ksweb/Meaningful-Minutes/7-things-to-kn
ow-about-BASEL-III-norms
Asset quality

• Asset quality refers to the degree of financial strength and risk in a bank’s
assets, typically loans and investments.
• A comprehensive evaluation of asset quality is one of the most important
components in assessing the current condition and future viability of the
bank.
• The quality of the bank’s assets impacts, in varying degrees, all components
of a bank’s financial performance.
• High levels of classified assets can have a negative impact on earnings
through lower interest income, higher provisions to the loan loss reserve
and increased administrative costs for managing and collecting these assets
Asset quality- parameters
• Asset quality problems can diminish the liquidity inherent in the loan
portfolio and have a negative impact on the adequacy of bank capital.
Poor asset quality also reflects upon management’s competence
• Net Non-Performing Asset (NPA) by total assets
• Net NPA by net advances
NPA ?
• As per guidelines issued by the RBI, banks classify an account as NPA
only if the interest due and charged on that account is not serviced
fully within 90 days from the day it becomes payable.
 Loans issued

Standard
Gross NPA
assets

Interest due
Payment is
not serviced
received by
within 90
due date
days
 Gross NPA

Substandard
Doubtful assets Loss asset
assets

Loan a/c remains If it has remained Internal auditor/

NPA for less than substandard external
or equal to 12 category for 12 auditor/RBI
months months declares
Rates of Provisioning for Sub-standard,
Doubtful & Loss assets
Category of Advances Rate %
SUB STANDARD
--- secured exposure 15
---unsecured exposure 25

DOUBTFUL ADVANCES
---unsecured portion 100
---secured portion
----for doubtful upto 1 year 25
----for doubtful > 1 year and upto 3 years 40
----for doubtful > 3 years 100
LOSS ADVANCES 100
Net NPA
Net NPA =
Gross NPA- provision for bad and doubtful assets
Management

• It involves a subjective analysis for measuring the efficiency of the

management.
• Return on net worth (RONW) –PAT/ Net Worth;
• this is the ‘final measure’ of profitability to evaluate overall return.
• This ratio measures return relative to investment in the company
• Profit per employee of the bank- This measures the overall efficiency
of the bank’s staff. Higher the ratio, higher the efficiency of the staff
or, for that matter, of the management.
Earnings

• assess the quality of income in terms of income generated by core

banking activity.
• The ratio of interest income to the total income.
• The percentage change in net profit to rank the bank
Liquidity

• The main objective behind this parameter is to assess the ability of a

bank to meet the demand from the deposit holders at a particular
time. Higher rank for banks with higher liquidity ratio.
• Liquidity can be compared based on the two parameters, namely:
• Liquid Asset/Total Deposit
• Liquid Asset/Total Asset
Some common parameters used
1. CASA/ total deposits ( determine access to low cost funds)
2. NIM = ( Interest earned- Interest paid)/ Average interest earning assets
3. Operating profit margin=(NII- operating exp)/Total interest income
4. Cost to income ratio =Operating expenses/ Total income
5. Other income to total income
6. Credit to deposit ratio
7. Provision coverage ratio = Cumulative provisions/Gross NPA
8. CAR
9. ROA= PAT/ Average total assets
10. Efficiency measures= interest income per employee; profit per employee;
business per employee
https://
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