CHAPTER-1

CONCEPTUAL FRAMEWORK OF CAMEL ANALYSIS

1.1 Evolution of Bank: - The term ‘Bank’ specifies an organization where people and
business can invest or borrow money; change it to foreign currency etc. According to
Hals bury “A Banker is an individual, Partnership or Corporation whose sole pre-
dominant business is banking, that is the receipt of money on current or deposit account,
and the payment of cheque drawn and the collection of cheque paid in by a customer.’’
The Origin and Use of Banks
The Word ‘Bank’ is derived from the Italian word ‘Banko’ signifying a bench, which
was initiated in the market-place, where it was customary to exchange money. The word
‘bank’ is used for the commercial bank. ‘Bank of Venice’ was called the first bank,
which was established in Venice, Italy in 1157 to finance the ruler in his wars. The
bankers of Lombardy were famous in England. But modern banking era was begun with
the English goldsmiths after 1640. The first bank was the ‘Bank of Hindustan’ in India,
founded in 1770 by Alexander & Co. but this bank was failed due to the closure of, an
English agency house in Calcutta in 1782. Then Bank of Bengal was established in
1806. It is considered to be first modern bank for keeping, recording, lending, and
exchanging of money in the market by money lenders.

1.2 The Indian Banking System: An Overview: -As we know that that the Indian banking
system is divided into three sectors which consists public, private and foreign sector
banks. As per the RBI report data on 2011, there were twenty seven public sector banks:
out of eight state banks (SBI & seven associates) and twenty nationalized banks, twenty
nine private banks (twenty one old private banks and eight new private banks) and thirty
foreign banks. The developments of liberalization and globalization have run to several
changes in the Indian banking sector. The Narasimham Committee Report (1991)
indicates that the reorganization process in the Indian banking sector will increase the
operational efficiency of the financial institutions and because of these modifications in
1991, the banking sector of Indian economy has seen many structural changes. The
access of private and foreign banks has generated competitive scenario for the public
sector banks.

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1.3 Role of Indian Banking Sector in present scenario: - Indian banking industry is the
fastest growing industry of Indian economy; it plays an important role in the whole
development of the country with mobilization of the savings& deposits and providing
the loans to the various sectors of the economy. Several studies reveal that a country
which has a well-developed banking system grows faster than those with a weaker
banking system. The main aim of banking sector is to maintain growth, stability,
soundness in the economy of a country. Therefore it is essential to measure the
soundness of various banks of the country and develop suitable strategies and policies to
encourage and develop efficiency among these sectors. They promote the deposits by
offering high rates of interest, then converting savings, into active loans and advances
among the enterprises which are directly connected with economic development. In this
way, they promote the development of the priority sectors like agriculture, trade and
small scale industries.
Performance evaluation of Indian Banking Sector is quite tough because there are some
other factors which keeping in mind when differentiating the banks from goods to bad
ones. Financial Performance of the banks is measured at two levels, one is by the
internal management and supervisory level of the banks (internal ratings), and second
through external rating agencies. The main aim of these internal supervisory and
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 regulatory rating systems is to determine the bank performance at regular internal level
and keep the bank on right track. These ratings are highly confidential and make
available to the internal top level bank management.

1.4 Significance of Credit ratings in economic growth:-As we know that credit ratings
can inspire the economic development of any country, enhance consumer’s access to
crucial resources and assist in more skilled distribution of risk, costs and economic and
financial institutions. Ratings supplied by these credit rating agencies are used by
different banks, financial institutions with the objective to formulate the risk premium
they will charge their customers on loans they issues and corporate bonds. A lower
credit rating means a higher risk premium with higher interest rate charged to
corporations and individuals. Institutions with a higher credit rating are able to raise
funds at a lower interest rate, Most credit agencies use their own methodology for
determining credit ratings, but only few of the popular credit ratings agencies exists, this
improves a deal of regularization in the credit rating.

1.5 Conceptual Framework of CAMEL Model: - CAMEL model is a ratio based internal
rating, monitoring, regulatory and supervisory tool to evaluate the financial condition of
the banks through it’s on- site and off-site surveillance mechanism. CAMEL is
systematic, methodical, and attentive tool in its assessment process. CAMEL model
encourage the financial institutions transparency, evolution and transformation by using
its tested methodology. It includes analysis of both qualitative and quantitative values
with quantitative significant financial ratios; however qualitative approach refers to the
subjective elements that assist the financial institutions operations. It is an effective
internal rating tool that guides the banks, before failure happens and takes remedial
actions, although CAMEL Rating System was developed by the American banking
system.
The term CAMEL stands for Capital Adequacy, Asset Quality, Management quality,
earnings ability and Liquidity management. The criteria for the performance of all the
banks under CAMEL rating include the above mentioned.
1. Capital Adequacy: It evaluate whether the banks have a strong capital base for
unexpected loan losses or provisions or not. It signifies the relationship between equity
and risk weighted assets of the financial institutions, how to increase the equity and also

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 measure the ability to which the institution observes the loan losses. As we know that
capital Adequacy is the first element of CAMEL framework. Capital provides a
safeguard against the unexpected losses which supports the banks to survive, by
overcoming the risk of bankruptcy. It reflects the ability of management to report the
emerging needs for additional capital, the balance sheet structure and a financial
institution’s admittance to capital markets and other sources of capital including
financial assistance provided by a parent holding company. As per the RBI guidelines,
Banks should have maintained minimum 9 % CAR. It is computed by dividing the total
of Tier-I and Tier-II capital by the risk weighted assets. While rating the capital
adequacy of the banks, ratios are used to assess the banks the difference between the
total assets and total liabilities is called capital. If there is any loss incurred because of
NPA’S, it will create the risk on banks to meet the demand of their depositors. The
Basel capital has two parts. These are, Tier one, and Tier two capitals.
Tier I:-Tier one is a type of capital, which is considered to be core or original capital
that consist of common equity, preferred equity, convertible bonds and retain earning.
Tier II: Tier II capital is also known as hybrid capital because it includes that amount
which is derived from issued bonds by the banks. These amounts decrease the
guarantees of buyers because these are of long-term in nature.

Ratings criteria for Capital Adequacy:-

• A rating of A + or 1 states that a bank has strong capital base in relation to its risk
profile.
• A rating of A or 2 states that a bank has a satisfactory capital base in relation to its risk
Profile.
• A rating of B or 3 states that a bank has a less than satisfactory level of capital which
does not support the bank’s risk profile. This rating reflects a need of improvements,
though capital level exceeds minimum regulatory and statutory requirements prescribed
by RBI.
• A rating of C or 4 states that bank has a deficient level of capital in relation to its risk
profile which indicates the bank requires financial support from its shareholders.
• A rating of D or 5 states that a bank has a very critical deficient level of capital so, the
Sustainability of the institution is quite risky and requires immediate financial assistance
from the Shareholders.
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 2. Asset Quality: It indicates the quality of the assets portfolio maintained by the banks,
and also assesses the portfolio of risk and the efficiency of the long term assets Asset
quality. It is the second important component of CAMEL. Asset quality shows the
quality of the bank’s earning assets, which is mainly of the bank’s loan and advances
portfolio (credit risk, investments portfolio (market risks) and off-balance sheet items
(guarantees, letters of credit and derivative instruments etc. The main aim to measuring
the assets quality is to ascertain the risk involves with the advances of becoming unpaid
a part of principal and interest. Weakening and development in the quality of assets is
the main source of earning difference in a bank because its main function is providing
loans. It has been seen that poor asset quality is the main reason of most bank failure.
The factors considered by the supervisory and regulatory authorities during on-site
monitoring and evaluation of the banks’ asset quality and also determine the quality of
the loan sanctioned.
• Proper assessment of risk, terms and conditions should be analyzed before sanctioning
the loan as well as lending is made against collateral guarantees.
• Evaluation and determination of the non-performing assets re-structured and postponed
loans which are subject to administrative/legal action for collection.
• To find the chances of success for the collection of non-performing assets and
receivables.

Ratings criteria for Asset Quality

• A rating of A+ or 1 specifies that a bank that possess strong quality of assets and credit
administration policies.
• A rating of A or 2 specifies that a bank possess satisfactory quality of assets and credit
administration policies.
• A rating of B or 3 specifies a bank that possesses less satisfactory quality of assets and
credit administration policies. .
• A rating of C or 4 specifies a bank which has deficient quality of assets or credit
administration policies. The risk level of assets is significant, ineffectively controlled,
and subject the bank to potential losses or, may threaten its sustainability.
• A rating of D or 5 specifies that a bank possess critically deficient quality of assets or
credit an administration policy that reflects the immediate threat to the bank’s
sustainability.
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 3. Management Quality: -The third component of CAMEL is management quality which
examines the experience, standing and technical knowledge, honesty and integrity,
willingness to keep proper regulated environment, strategic planning and the ability to
keep effective internal and external leadership and monitoring, are the important factors
to analyses the bank’s performance. Management quality assesses the effectiveness of
the managers or staff to earn maximum from available earning assets and also to control
bank costs. Management is also responsible for the overall performance of the banks and
measuring the risk profile. The ratios are used to measure the efficiency and
effectiveness of management. It determines whether the board of directors i.e. top
management and other staff resource management are performing their assigned job or
not and also evaluates their regular performance whether they provide proper guidance
and all facilities to their staff or not.

Factors are considered while rating the management’s quality is as follows:

• Board of directors and the top management of the bank must have the abilities to
determine the business activities and the risk associated with that and also make
alternative plans to save the bank from future problems.
• It is the prime responsibility of management to develop and implement the plans,
policies, procedures, MIS, effective leadership and risk monitoring system; an effective
management must have the ability to deal with changing financial system.
• There must be proper internal and external audit for Job explanation, reward policies etc.

Ratings criteria for Management Quality:-

• A rating of A+ or 1 states that a bank have a strong management performance and top
management have strong risk management practices against to the banks size, nature,
complexity, and risk profile.
• A rating of A or 2 states that a bank have a satisfactory management performance and
board may have better risk management practices against to the banks size, nature,
complexity and risk profile, only minor weaknesses are exists.
• A rating of B or 3 states that a bank has a less satisfactory management performance and
board may need improvement in risk management practices against the nature, size and
complexity of the bank’s risk profile.
• A rating of C or 4 states that a bank has a deficient management performance and board
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 is incapable in determining the risk management practices against the nature of the
banks activities. Here replacement of management is required.
• A rating of D or 5 states that a bank has critical deficiency of management performance.
The top management and the board do not have the ability to correct problems and uses
proper risk management practices.
4. Earning Capacity: - Earnings are the most crucial component of CAMEL to measure
the performance and soundness of a bank. It helps in evaluating the performance of the
banks to increase and maintain the total revenue through earnings from operations and
also assess the profitability of a bank and clarify its sustainability and growth. The
earnings and profitability is the fourth essential element used in the evaluation of the
bank financial performance and its future growth prospects. Profitability is an essential
area for the survival and existence of a bank to analyses the earnings is a quantitative
measure of management’s ability to utilize the assets efficiently and also generate profits
for shareholders and maintain capital soundness. Earnings helps to evaluate it financial
performance through measuring return on assets, operating profits , net profits and also
analysis the level of operating expenses and the exposure of earnings to market risk such
as interest rate foreign exchange risk and market price risk.
The factors considered by the supervisory and regulatory authorities to assess the
quality of assets are
• To evaluate the undistributed profits and reserves, retained earnings, profits, and their
authentication whether an adequate capital are generated through this channel or not.
• To determine the quality sources of earnings and incomes, budgeting policies and
Management Information Systems (MIS).

Ratings Criteria for Earnings:-

• A rating of A+ or 1 state that a bank has strong and sufficient earnings to support
operations and conserve an adequate capital level.
• A rating of A or 2 states that a bank has satisfactory and sufficient earnings to support
operations and conserve an adequate capital level.
• A rating of B or 3 states that banks earnings are need to be improved.
• A rating of C or 4states that a bank has deficient earnings that are insufficient to support
operations and need to maintain proper capital levels and allowances.
• A rating of D or 5 stated that a bank has critically deficient earnings and facing heavy
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 losses that represent a threat to its survivability through the loss of capital.
5. Liquidity Management: -As we all know that the liquidity ratio states the level or limit
up to which a bank is able of filling its respective liabilities. Liquidity is measured by
the level of earnings, the fifth component of CAMEL Framework is liquidity, and it is
an important element for both good and bad banks. All banks are highly concerned for
their liquidity risk; i.e., the problem which arise due to the bank failure in meeting its
current financial obligations (e.g., depositors) because of inadequate current assets such
as cash and quickly cash type marketable securities, Banks generate money by
mobilizing short-term savings of the people converting into deposits at lower interest
rate, and then lending these funds in long-term loans at higher rates of interest, so it is
quite risky for banks to mismatch their lending interest rate.

Ratings criteria for Liquidity:-

• A rating of A+ or 1 specifies a bank that possesses a strong liquidity position and well
developed funds policies.
• A rating of A or 2 specifies a bank that possesses a satisfactory liquidity position and
funds management performances.
• A rating of B or 3 specifies a bank which requires need of improvements in liquidity
levels or funds management performances.
• A rating of C or 4 specifies a bank that has deficient liquidity levels or inadequate funds
management performances.
• A rating of D or 5specifies a bank that has critical deficient liquidity levels or funds
management performances and the continued sustainability of the bank is quite risky.

1.6 Significance of CAMEL Model in Banks Supervision& Public Monitoring:-Several

studies have been made to analysis to measure the extent of effectiveness of private
supervisory information in the regulating and monitoring of performance of banks. In
case of predicting bank’s failure, CAMEL ratings are used to evaluate the overall
performance of banks, due to the increasing competition with the global financial
markets. It shows the exact conditions and performances of banks through on-site and
off-site monitoring system. Its main goal is to provide an accurate, regular and reliable
assessment of a bank’s financial statement, condition in the areas of capital adequacy,
asset quality, management abilities, earnings and liquidity management. The direct
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 public recipients of private regulatory information, such as provided by CAMELS
ratings are beneficial for the depositors, shareholders and investors of banks.

1.7 Brief Profiles of Selected Public and Private Sector Banks in India: An attempt has
been made to highlight in brief the history and Profile of selected public and private
sector banks under the study:

Brief Profiles of Selected Public Sector Banks (PSBs) in India:

1. History and Profile of State Bank of India (SBI):- SBI is considered to be the
largest public sector banking company in India which was established on 1 July 1955.
Its headquarters is in Mumbai. As on 31 March 2016, SBI has 49,577 ATM’S &SBI
group has 58,541 ATM’S and 293,459 employees.
2. History and Profile of Bank of Baroda (BOB):- BOB is considered to be the second
largest public sector banking company in India which was established on 20 July 1908
with a paid up capital of Rs. 1 million by Maharaja Sayajirao III of Baroda. It’s
headquarter is in Vadodara, Gujarat. In 2015 it has a network of 5326 domestic and
overseas branches in India and abroad, and over8000 ATMs.
3. History and Profile of Punjab National Bank (PNB):- PNB is one of the four largest
public sector bank and financial services company in India which was established on
19 May 1984 by Lala Lajpat Rai. It’s headquarter is in New Delhi. It has a network of
6,968 branches in India and abroad, and over 9,656 ATMs in across 764 cities.
4. History and Profile of Bank of India (BOI):- BOI is the fourth largest public sector
bank and financial services company in India which was established on 7 September
1906 with a paid up capital of Rs. 50 lakh by group of eminent business men of
Mumbai. Its head quarter is in Mumbai, Maharashtra. In December 2013, it has a
network of 4828 branches in India and 56 offices in abroad, and over 8000 ATMs.
5. History and Profile of Canara Bank: - Canara Bank is one of the multinational
public sector bank and financial services company in India which was established on
July 1906 with a paid up capital of Rs. 50 lakh by late shri Ammembal SubbaRao Pai.
Its head quarter is in Bangalore, Karnataka. As of November 2015, the bank had a
network of 5784 branches and more than 9153 ATMS spread across India, total assets
of 4.72 trillion and 53,506 employees.

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 6. History and Profile of Industrial Development Bank of India (IDBI):- IDBI is a
wholly owned subsidiary of the RBI under an Act of Parliament but in 1976, its
ownership was transferred to the Government of India which was established in 1964
by Act of Parliament. Its head quarter is in Mumbai, Maharashtra. It had a network of
1853 branches, including one overseas branch at Dubai, and 1382 centers, 16555
employees with a balance sheet size of 3,74,372.13 cores.
7. History and Profile of Union Bank: - Union Bank is one of the largest public sector
banking and financial services company in India which was established on 11
November 1919 by Mahatma Gandhi. Its head quarter is in Mumbai, Maharashtra. As
of March 2016, the bank had a network of 4196 branches and more than 6909 ATMS
spread across India.
8. History and Profile of Syndicate Bank:-:- Syndicate bank is one of the major and
oldest public sector banking and financial services company in India which was
established on 10, November,1925 with the name of Canara Industrial and Banking
Syndicate Ltd. by T M A Pai, UpendraPai and Vaman Kudva. Its head quarter is at
Manipal, Karnataka. As of March 2008, the bank had a network of 3682 domestic and
1 overseas branch and 27227 employees.
9. History and Profile of Central Bank of India (CBI):- CBI is one of the oldest and
largest public sector commercial banks in India which was established on 21
December 1911 by Late Sorabji Pochkhanawala. Its head quarter is in Mumbai,
Maharashtra. Its total business at the end of the last fiscal amounted to 45,05,390
(approx.) million and approx. 42000 employees.
10. History and Profile of UCO Bank: - UCO bank is one of the oldest public sector
commercial banks in India which was established in 1943. Its head quarter is in
Kolkata, Maharashtra. It has 34 domestic regional offices. This bank has approx.30109
employees in 2015. This bank also considered as authorized host branch for the
collection of direct tax.

Brief Profiles of Selected Private Sector Banks in India

1. History and Profile of Industrial Credit and Investment Corporation of India
(ICICI):- ICICI Bank is considered to be the largest private sector bank in India
which was established in 1994, In September 10, 1999, it has a network of 4,450
branches and 13,995 ATMs in India, and has a presence in 19 countries including

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 India.
2. History and Profile of Housing Development Finance Corporation Ltd (HDFC):-
HDFC Bank is one of the largest Private Sector financial services companies in India
which were established on 30, August 1994 by Housing Development Finance
Corporation Ltd. Its headquarter is in Mumbai. As of June 30, 2016, it has a network
of 4,541 branches and 12,013 ATMs, about 76,286 employees.
3. History and Profile of Axis Bank: - Axis Bank is the third largest Private sector
financial in India which was established in 1993. In the year 1994, its registered office
is at Ahmedabad and corporate office at Mumbai. As of 12 Aug 2016, the bank had a
network of 3,120 branches and 12,922 ATM’S.
4. History and Profile of Yes Bank: - Yes Bank is considered to be the fifth largest
private sector Bank in India, founded by Rana Kapoor in 2004. And its head office is
at Mumbai. It has a network of about600 branches and 2,000 ATMs.
5. History and Profile of IndusInd Bank: - IndusInd Bank Ltd is one of the new
generation private sector banks in India which was established in 1994 with a paid up
capital of 1 billion by Mr. Srichand P Hinduja. It’s headquarter is in Mumbai. It has a
banking network of 800 branches, and 1500 ATMs as of April 2016.
6. History and Profile of Kotak Mahindra Bank:-Kotak Mahindra Bank is a sixth
largest private sector bank in India which was established in 2003. It’s headquarter is
at Mumbai, Maharashtra. As of 30 September 2014, it has a network of 641 domestic
and overseas branches and about 1,159 and above ATMs and has approax.29, 000
employees.

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