Presented by-

Rideep Kumar Das

CAMELS RATING Mahasweta Mazumdar

Tahmeed Ahmed Hazarika
Atifa Begum
Rosni Hira
 Introduction

• CAMELS is a recognized international rating system that bank

supervisory authorities use in order to rate financial
institutions according to six factors represented by its acronym.
• The CAMELS Rating System was developed in the United States as a
supervisory rating system to assess a bank’s overall condition.
• It came in India in early 90s.
• In 1995 RBI had set up a working group.
• A rating system for domestic and foreign banks based on the
international CAMELS model was introduced.
What does CAMELS stands for?
 Capital adequacy

• Capital adequacy assesses an institution’s compliance with regulations on the

minimum capital reserve amount. Regulators establish the rating by assessing
the financial institution’s capital position currently and over several years.

Future capital position is predicted based on the institution’s plans for the
future, such as whether they are planning to give out dividends or acquire
another company. The CAMELS examiner would also look at trend analysis, the
composition of capital, and liquidity of the capital.
Assets
• This category assesses the quality of a bank’s assets. Asset quality
is important, as the value of assets can decrease rapidly if they are
high risk. For example, loans are a type of asset that can become
impaired if money is lent to a high-risk individual.
The examiner looks at the bank’s investment policies and loan
practices, along with credit risks such as interest rate risk and
liquidity risk. The quality and trends of major assets are
considered. If a financial institution has a trend of major assets
losing value due to credit risk, then they would receive a lower
rating.
 Management capability

• Management capability measures the ability of an institution’s management

team to identify and then react to financial stress. The category depends on
the quality of a bank’s business strategy, financial performance, and internal
controls. In the business strategy and financial performance area, the CAMELS
examiner looks at the institution’s plans for the next few years. It includes the
capital accumulation rate, growth rate, and identification of the major risks.
 Earnings

• Earnings help to evaluate an institution’s long term viability. A bank needs an

appropriate return to be able to grow its operations and maintain its
competitiveness. The examiner specifically looks at the stability of
earnings, return on assets (ROA), net interest margin (NIM), and future earning
prospects under harsh economic conditions. While assessing earnings, the core
earnings are the most important. The core earnings are the long term and
stable earnings of an institution that is affected by the expense of one-time
items.
 Liquidity

• For banks, liquidity is especially important, as the lack of liquid capital can
lead to a bank run. This category of CAMELS examines the interest rate
risk and liquidity risk. Interest rates affect the earnings from a bank’s capital
markets business segment. If the exposure to interest rate risk is large, then
the institution’s investment and loan portfolio value will be volatile. Liquidity
risk is defined as the risk of not being able to meet present or future cash flow
needs without affecting day-to-day operations.
 Sensitivity

• Sensitivity is the last category and measures an institution’s sensitivity to

market risks. For example, assessment can be made on energy sector lending,
medical lending, and agricultural lending. Sensitivity reflects the degree to
which earnings are affected by interest rates, exchange rates, and commodity
prices, all of which can be expressed by Beta.
 CAMELS RATING
• Analysts rate financial institutions → 1 to 5.
• Ratio analysis approach is used.
• Composite score – to categorise banks.
CAPITAL ADEQUACY 18
ASSET QUALITY 18
MANAGEMENT 18
EARNINGS 10
LIQUIDITY 18
SENSITIVITY 18
FIG: WEIGHTAGE OF PARAMETERS

Submitted by: Mahashweta Mazumdar

Exam roll no: PM-211-836-0034
Parameters and Components of CAMELS RATING:

1. Capital Adequacy: bank capital corresponding to the risk weighted credit

exposures.
Capital Adequacy is rated based on:
 Size of bank
 Volume of inferior quality assets
 Bank’s plans and prospects for growth, etc.
2. Asset Quality: Measures the credit risk prevailing.
It is rated based on:
 Volume of classifications
 Special mention loans
 Level, trend and comparison of non-accrual and renegotiated loans.

3. Management Quality: Measures ability of managers in controlling risks.

It is rated based on:
 Technical competence
 Compliance with – banking laws and regulations
 Adequacy and compliance with internal policies.
4. Earnings: Amount of and trend in earnings.
It is rated based on:
 ROA compared to peer group averages and bank’s own trends.
 Material components, income and expenses .
 Adequacy of loan losses, etc.

5. Liquidity: Adequacy of the current and potential liquidity sources.

It is rated based on:
 Adequacy of liquidity sources, compared to present and future needs.
 Availability of assets that could be readily convertible to cash.
 Access to money markets.
6. Sensitivity to market risks:
Sensitivity of the financial institution’s net earnings to changes in interest rate,
exchange rate, etc.
It is rated based on:
 Sensitivity of the net earnings to changes in interest rates
 Volume, composition and volatility of any foreign exchange
 Volatility of earnings due to changes in the market valuation of trading portfolios.
CAMELS RATINGS AND ANALYSIS

Regulators assign a rating of 1 -5 in each six categories and an overall

composite rating.
Following is a description of the graduations of rating
Rating 1 – indicates strong performance . BEST rating
Rating 2 – indicates above average performance that adequately provides for
the safe and sound operations of the banking company
Rating 3 – represents performance that is flawed to some degree
Rating 4 – refers to marginal performance and significantly below average
Rating 5- indicates very unsatisfactory performance in need of immediate
remedial attention for the sake of banking company’s survival : WORST rating
COMPOSITE CAMELS RATING

 An overall composite CAMELS rating which also ranges from one (1) to five

(5) and is developed from the evaluation. The composite rating determined

after an on site examination provides a means to categorize banks based on

their overall health, financial status and management.

 The rating of 1 indicate the strongest performance and risk management

practices relative to the institution’s size , complexity and risk profile; and the

greatest supervisory concern. The composite ratings are defined as follows

COMPOSITE CAMELS RATING:

RATING COMPOSITE RANGE DESCRIPTION

1 1-1.4 STRONG
2 1.6-2.4 SATISFACTORY
3 2.6-3.4 FAIR (watch category)
4 3.6-4.4 MARGINAL
5 4.6-5 UNSATISFACTORY

FIG: COMPOSITE CAMELS RATING

 Composite 1 [ strong] [1-1.4]
 Sound in every respect
 Generally have rating 1 or 2
 Minor weakness
 Capable of withstanding the vagaries of business conditions
 Resistant to outside influence
 Compliance with laws and regulations

Composite 2 [ Satisfactory] [1.6 – 2.4]

 Fundamentally sound
 No component rating should be more than 3
 Moderate weakness
 Stable and capable of withstanding business conditions
 Satisfactory risk management practices
 No material supervisory concern
 Composite 3 [fair] [2.6-3.4]
 Some degree of supervisory concern in one or more component area
 Exhibit combination of weakness that may range from moderate to severe
 More vulnerable to outside influences
 In significant non compliance with laws and regulations
 Risk management practices may be less than satisfactory relative to the institution’s size,
complexity and risk profile
 Requires more than normal supervision

Composite 4 [Marginal] [3.6-4.4]

 Exhibit unsafe and unsound practices or conditions
 Serious financial or managerial deficiencies that result in unsatisfactory performance
 Problems range from severe to critically deficient
 Weakness and problems are not being satisfactorily addressed or received by the board of
directors and management
 Unacceptable risk management practices
 Close supervisory attention is required (formal enforcement)
 Institutions in this group pose a risk to the deposit insurance fund
 Failure is a distinct possibility if the problems and weakness are not satisfactorily
addressed and resolved

Composite 5[unsatisfactory] [4.6-5]

 Exhibit extremely unsafe and unsound practices or conditions
 Often demonstrate inadequate risk management practices
 Volume and severity of the problems are beyond management’s ability or willingness to
control or correct
 Immediate outside financial or other assistance is needed
 Ongoing supervisory attention is necessary
 Failure is highly probable.
Evaluation of camel’s rating system :-
Camel’s rating of banks :-
Strong Satisfactory Fair Marginal Unsatisfactory
Dhaka bank Islami bank Uttara Janata Sonali
Prime bank National bank AB Agrani Oriental
One bank UCBL IFIC First security BCBL
BASIC BANK EBL Premier BSRS
Standard bank NCCBL Shahjalal
Mutual trust South East BRAC
Bank Asia Al-Arafah BSB
Commercial bank of Dutch-Bangla
Ceylon
Standard chartered Mercantile

State bank of india EXIM

Citibank N A Jamuna
Woori Bank Habib
HSBC NBP
City Bank
PURPOSES OF CAMELS RATING

The purposes of CAMELS rating is to determine a bank’s overall condition and to identify its strengths and
weaknesses:

 Financial
 Operational
 Managerial
 What happens when a Bank receives a poor CAMELS Rating?

A poor CAMELS rating will result in an FDIC-regulated bank being deemed not “well-managed,” which will
prevent its affiliates from being able to engage in certain financial activities, including-
 Underwriting
 Investment Advisory
 Insurance Activities
In addition, together with asset size, a bank’s CAMELS rating determines the premium it must
pay into the FDIC’s deposit insurance fund. Poor CAMELS ratings also make FDIC-regulated
banks subject to higher capital requirements and more frequent examinations. Under the rules
of the other federal banking agencies, a poor CAMELS rating can hinder a bank’s ability to
engage in mergers and acquisitions and to make basic changes to its business, such as opening
new branches or moving existing branches, and appointing new directors and senior executive
officers.
If a Bank Objects to Its CAMELS Ratings, Can
It Seek Judicial Review?

• According to the FDIC, the answer is no — despite the fact that the
unavailability of review would seem to be contrary to fundamental
precepts of administrative law, as codified in the Administrative
Procedure Act (APA).
• Banks may theoretically challenge a CAMELS rating through an intra-
agency appeals process. However, here are significant deficiencies with
those processes – including that there are “few intra-agency appeals” by
banks, that banks “rarely win” FDIC appeals, and that use of financial
institution intra-agency appeals processes is limited by the fact that
“some financial institutions believe that appealing is futile and others
fear retaliation.” These flawed agency appeals processes further
highlight the importance of the availability of judicial review for CAMELS
ratings in certain circumstances.
Advantages of camel’s rating :-

• It is an essential tool for the identification of the financial strengths and weakness of a
bank.
• It helps to point out , measure , look after and control risks of the institution’s daily
activities.
• It helps to ensure safe operation of the institution.
• It helps in assessing an institution’s capital adequacy.
• It helps to determine the financial health of the institution.
Disadvantages of camel’s rating:-

• Insufficient quality of bank management.

• Complete reliance on data provided by the banks.
• Somewhat inconsistencies in the ranges.
• Unavoidable delay in determining CAMELS rating.
• Scope of verification is limited.
Conclusion

Despite the drawbacks, most supervisors in the world retained CAMELS rating as
a part of its supervisory functions. Solving these problems will provide an
effective tool of integrated rating assessment for every bank.
THANK YOU!