EVALUATE EFFICIENCY AND

PERFORMANCE OF PRIVATE
SECTOR BANKS THROUGH
CAMEL METHODOLOGY











Submitted to : Dr. Simmi Khurana
Submitted by: Aanchal Nirbhya & Shivani Kaushik



AJAY KUMAR GARG INSTITUTE OF MANAGEMENT






Table of Contents

Acknowledgement
Introduction
Objective
Data Collection
Research Methodology
Review of Literature
Findings & Analysis
Capital Adequacy
Asset Quality
Management Efficiency
Earnings Efficiency
Liquidity
Conclusion


Acknowledgements

We take this opportunity to express our profound gratitude and
deep regards to our guide Professor Simmi Khurana for her
exemplary guidance, monitoring and constant encouragement
throughout the course of this research report. The blessing, help
and guidance given by her time to time shall carry us a long way
in the journey of life on which we are about to embark.

We also take this opportunity to express a deep sense of
gratitude to Dr T R Pandey, Director, AKGIM, for his cordial
support, valuable information and guidance, which helped us in
completing this task through various stages.

We are obliged to faculty members of AKGIM, for the valuable
information provided by them in their respective fields. We are
grateful for their cooperation during the period of my research
report.

Lastly, we thank almighty, our parents, brother, sisters and
friends for their constant encouragement without which this
research would not be possible.



Introduction
The economic development of a country depends more on real factors such as the
industrial growth & development, modernization of agriculture, expansion of
internal trade and foreign trade. The role and importance of banking sector and the
monetary mechanism cannot be under-estimated in the development of a nation.
Hence the banks and financial institutions play significant and crucial role by
contributing in
Economic planning such as lying down of specific goals and allocating particular
amount of money that constitute the economic policy of the government. A sound
financial system is indispensable for the growth of a healthy and vibrant economy.
A sound banking industry comprises a paramount component of the financial
services sector. Performance of the banking sector is an effective measure and
indicator to check the performance of any economy to a large extent. The banking
sectors performance is perceived as the replica of economic activities of the
economy as a healthy banking system plays as the bedrock of economic, social and
industrial growth of an economy. Banking system in our economy has been
allotted a crucial and noteworthy role in financing the planned economic growth.
The studies of McKinnon(1973) and Shaw (1973) emphasized the role of financial
system in economic growth and opined that there is a strong correlation between
economic growth and financial system development. One more study concluded
that development of financial system excels the economic growth through various
channels(Levine and Zervos, 1998). The banks according to Gerschenkron (1968)
substituted for the absence of a number of elements crucial to industrialization. The
German investment banks were a powerful invention like a steam engine, which
played the capital-supplying functions a substitute for the insufficiency in the
financial system.

Banks are playing crucial and significant role in the economy in capital formation
due to the inherent nature, therefore banks should be given more attention than any
other type of economic unit in an economy. Evaluation of financial performance of
the banking sector is an effective measure and indicator to check the soundness of
economic activities of an economy. The banking sectors performance is perceived
as the replica of economic activities of the economy. The stage of development of
the banking industry is a good reflection of the development of the economy.




Objective
The objective of the research paper is
1. Evaluate the performance and efficiency of the Indian Public Sector Banks and
Indian Private Sector Banks post recession during the period 2008-2009, whose
last two quarters were affected by the Global Crisis, using the CAMEL
methodology .
2. The paper also Ranks each bank on the basis of the findings got by the CAMEL
Methodology evaluations.


Data Collection
The data has been collected from the annual reports of the banks and other
corporate databases. The Sample Size is of 15 Private Sector Banks whose annual
reports for 2008-2009 were readily available.


Research Methodology

The present study of Banks is based on CAMEL Methodology, which evaluates
each and every component that is of prime importance from the functioning of the
Banks perspective. The model examines the efficiency of banks among these
important parameters like Capital Adequacy, Asset Quality, Management,
Earnings Quality and Liquidity of Indian Banks which are categorized into Indian
Private Sector Banks. All the banks were first individually ranked based on the
sub-parameters of each parameter. Banks were ranked in the ascending/descending
order based on the individual sub-parameters.


Review of literature

In order to evaluate the financial performance of banking sector the researchers,
academicians and policy makers have investigated several studies in different time
periods. A study conducted by Barr et al. (2002) viewed that CAMEL rating
criteria has become a concise and indispensable tool for examiners and regulators.
This rating criterion ensures a banks healthy conditions by reviewing different
aspects of a bank based on variety of information sources such as financial
statement, funding sources, macroeconomic data, budget and cash flow. Said and
Saucier (2003) used CAMEL rating methodology to evaluate the liquidity,
solvency and efficiency of Japanese Banks, the study evaluated capital adequacy,
assets and management quality, earnings ability and liquidity position. Sarker
(2005) in Bangladesh examined the CAMEL model for regulation and supervision
of Islamic banks by the central bank.
This study enabled the regulators and supervisors to get a Shariah benchmark to
supervise and inspect Islamic banks and Islamic financial institutions from an
Islamic perspective. Nurazi and Evans (2005) investigated whether CAMEL(S)
ratios could be used to predict bank failure. The results suggested that adequacy
ratio, assets quality, management, earnings, liquidity and bank size are statistically
significant in explaining bank failure. Olweny and Shipo (2011) found that poor
asset quality and low levels of liquidity are the two major causes of bank failures.
Poor asset quality led to many bank failures in Kenya in the early 1980s. Ongore
and Kusa (2013) concluded that the financial performance of commercial banks in
Kenya was driven mainly by board and management decisions, while
macroeconomic factors have insignificant contribution.





Findings and Analysis
Camel Model

6.1 Capital Adequacy
Capital adequacy reflects the overall financial position of a bank and also the
ability of the management to meet the need for additional capital requirement.


6.1.1 Capital Adequacy Ratio (CAR)
CAR reflects the ability of a bank to deal with probable loan defaults. The RBI
guidelines stipulate banks to maintain a CAR of minimum 9%. It is arrived at by
dividing the Tier I and Tier II capital by risk-weighted assets. Tier I capital
includes equity capital and free reserves. Tier II capital comprises subordinated
debt of 5-7 year tenure. The higher the CAR, the stronger the bank.

6.1.2 Debt-Equity Ratio (D/E)
Debt-Equity Ratio is arrived at by dividing the total borrowings and deposits by
shareholders net worth, which includes equity capital and reserves and surpluses.

6.1.3Advances to Assets (ADV/AST)
This is the ratio of the Total Advances to Total Assets. Total Advances also
include receivables. The value of Total Assets excludes the revaluations of all the
assets.



















Private Sector Banks
BANK
CAR (%) D/E (TIMES) ADV/AST (%)
2008-09 RANK 2008-09 RANK 2008-09 RANK
Axis Bank 13.69 9 1.52 11 55.20 10
Bank of Rajasthan 11.50 14 0.46 8 45.14 15
City Union 12.49 12 0.00 1 61.02 2
Dhanalaxmi 15.38 5 0.20 3 56.64 9
Development
Corporation Bank
13.30 11 0.83 10 54.96 11
Federal Bank 20.14 1 0.28 5 57.45 7
HDFC Bank 15.10 6 0.65 9 53.93 13
ICICI Bank 15.92 4 1.86 13 57.47 6
INDUSIND Bank 12.33 13 1.97 14 56.99 8
Karnataka Bank 13.54 10 0.23 4 51.61 14
Karur Vyasa Bank 14.12 8 0.02 2 61.02 2
Kotak Mahindra Bank 20.01 2 1.72 12 57.90 5
Lakshmi Vilas 10.29 15 0.31 6 63.03 1
SIB 14.76 7 0.32 7 58.15 4
Yes bank 16.60 3 2.17 15 54.16 12


On the parameter of Capital Adequacy Ratio (CAR), Federal Bank is on top
ranking. Lakshmi Vilas Bank has the lowest CAR of 10.29% amongst its private
sector peers.
Advances to Assets ratio is reflects a banks positions and risk taking ability in
lending funds. A higher Advances/Asset ratio shows that the bank is aggressively
lending fund and vice versa. A general perception has been that private sector
banks are more aggressive lenders as compared to their public sector counterparts.
However, the trend seems to have reversed in the fiscal 2008-09 during which the
PSBs have bettered the Ratio while the private sector banks turned risk-averse.
Lakshmi Vilas Bank registered an increase to 63.03% in FY09 from 58.99% in
FY08.
On the whole, Karur Vysya Bank tops the rankings amongst the private sector
banks.








6.2 Asset Quality
The asset quality is to ascertain the proportion of non-performing assets as a
percentage of the total assets .It also ascertains the NPA movement and the amount
locked up in investments as a percentage of the total assets.

6.2.1 Net NPAs to Total Assets (NNPAs/TA)
It is a measure of the quality of assets in a situation where the management has not
provided for loss on NPAs.

6.2.2Net NPAs to Net Advances (NNPAs/NA)
Net NPAs are Gross NPAs net of provisions on NPAs and suspense account.

6.2.3 Percent age Change in Net NPAs
This measure gives the movement in Net NPAs in relation to Net NPAs in the
previous year. The higher the reduction in Net NPA levels, the better it is for the
bank.



Private Sector Banks
BANK
NNPAs/TA(%) NNPAs/TA(%) CH.INNPAs
2008-09 RANK 2008-09 RANK 2008-09 RANK
Axis Bank 0.22 05 0.40 04 31.75 06
Bank of Rajasthan 0.33 06 0.73 06 84.56 12
City Union 0.66 11 1.08 09 37.45 07
Dhanalaxmi 0.50 08 0.88 07 52.16 10
Development
Corporation Bank
0.20 04 3.88 15 -55.49 01
Federal Bank 0.17 02 0.30 02 57.69 11
HDFC Bank 0.34 07 0.63 05 110.24 13
ICICI Bank 1.20 14 2.09 13 30.46 05
INDUSIND Bank 0.65 10 1.14 11 -38.45 02
Karnataka Bank 0.51 09 0.98 08 09.03 04
Karur Vyasa Bank 0.15 01 0.25 01 49.33 09
Kotak Mahindra Bank 1.38 15 2.39 14 43.70 08
Lakshmi Vilas 0.78 13 1.24 12 08.95 03
SIB 0.66 11 1.13 10 295.38 14
Yes bank 0.18 03 0.33 03 386.52 15


Asset quality refers to the financial strength of and risk inherent in loans/advances
and investment made by a bank.
Karur Vyasa Bank has the lowest NNPA to Total Advances as well as NNPA to
Net Advances among the private sector peers. However, there has been an increase
of a whopping 49% in NPA levels of the bank during the fiscal under study. SIB
scores poorly on both these metrics, i.e., NNPA/TA and NNPA/NA, ranked 11 and
10, respectively. The worst performer on the basis of NNPA/TA is Kotak
Mahindra Bank. On the whole, the situation on the NPA front, although, looks a
little worrisome, yet they remained above the regulatory minimum even after the
financial crisis.

6.3 Management Efficiency
Refers to the efficiency of the Management in managing the bank


A Total Advances to Total Deposits (TA/TD)
This ratio measures the efficiency of the management in converting the deposits
available with the bank (excluding other funds like equity capital, etc.) into
advances.

B Profit Per Employee (PPE)
This measures the efficiency of the employee at the branch level. It also gives
valuable inputs to assess the real strength of a banks branch network. It is arrived
at by dividing the net profit of the bank by total number of branches.

C Return on Net Worth (RoNW)
It is a measure of the profitability of a bank.



















Private Sector Banks
BANK
TA/TD(%) PPE(Rs Crore) RONW(%)
2008-09 RANK 2008-09 RANK 2008-09 RANK
Axis Bank 69.48 08 0.10 03 17.78 06
Bank of Rajasthan 51.23 14 0.03 11 11.88 09
City Union 68.79 11 0.05 06 19.89 02
Dhanalaxmi 64.32 13 0.04 08 19.19 03
Development
Corporation Bank
70.46 06 -0.04 15 -15.49 15
Federal Bank 69.54 07 0.07 04 8.90 12
HDFC Bank 69.24 09 0.04 08 17.14 07
ICICI Bank 99.98 02 0.11 01 6.97 13
INDUSIND Bank 71.33 04 0.03 11 9.96 11
Karnataka Bank 58.08 13 0.05 06 18.10 05
Karur Vyasa Bank 68.93 10 0.06 05 18.28 04
Kotak Mahindra Bank 106.27 01 0.03 11 6.73 14
Lakshmi Vilas 71.27 05 0.02 14 10.94 10
SIB 65.51 12 0.04 08 16.30 08
Yes bank 76.71 03 0.11 01 20.52 01





As per the in terms of Total Assets/ Total Deposits and Profit Per Employee (PPE)
Among the private sector banks, Yes Bank leads with a figure of 20.52%, followed
by City Union Bank (19.89%) and Dhan Lakshmi Bank (19.19%), at No. 2 and No.
3, respectively. With respect to private Sector Bank , Management Efficiency YES
BANK tops the list even above other PSBs


6.4 Earnings Efficiency:
Much of a banks income is earned through non-core activities like investments,
treasury operations, corporate advisory services and so on.

6.4.1 Percentage Growth in Net Profit
It is the percentage change in net profit over the previous year.

6.4.2 Net Interest Margin (NIM)
Net Interest Margin (NIM) is defined as the difference between interest earned and
interest expended as a proportion of average total assets.
Interest income includes dividend income. Interest expended includes interest paid
on deposits, loans from RBI, and other short-term and long-term loans.

6.4.3 Non-interest Income/Working Funds (NII/WF)
This measures the income from operations other than lending as a percentage of
working funds.


Private Sector Banks BANK PAT GROWTH(%) NIM(%) NII/WF(%)
2008-09 RANK 2008-09 RANK 2008-09 RANK
Axis Bank 62.12 04 3.33 06 2.30 14
Bank of Rajasthan 11.91 11 2.88 11 0.78 01
City Union 20.04 09 3.39 05 1.52 05
Dhanalaxmi 76.32 03 3.06 09 1.67 08
Development Corporation Bank 55.68 15 3.55 04 1.70 10
Federal Bank 38.05 07 4.20 03 1.52 05
HDFC Bank 40.97 06 5.38 02 1.87 12
ICICI Bank 15.91 14 2.66 12 1.98 13
INDUSIND Bank 349.07 01 2.12 15 1.80 11
Karnataka Bank 10.34 12 2.50 13 1.66 07
Karur Vyasa Bank 14.75 10 2.92 10 1.69 09
Kotak Mahindra Bank 13.80 13 6.02 01 1.34 03
Lakshmi Vilas 218.29 02 2.43 14 1.51 04
SIB 36.98 08 3.17 07 0.92 02
Yes bank 51.16 05 3.11 08 2.29 15

A banks earnings quality reflects its profitability and sustainability of the same, in
the private sector on the EQ parameter include City Union Bank, Federal Bank and
HDFC Bank top the rank.





6.5 Liquidity:

6.5.1 Liquid Assets/Demand Deposits (LA/DD)
This ratio measures the ability of a bank to meet the demand from demand deposits
in a particular year.

6.5.2 Liquid Assets/Total Assets (LA/TA)
Liquid Assets include cash in hand, balance with RBI, balance with other banks
(both in India and abroad), and money at call and short notice. The ratio is arrived
by dividing liquid assets by total assets.

6.5.3 G-secs/Total Assets (G-Sec/TA)
This ratio measures the proportion of risk-free liquid assets invested in G-Secs as a
percentage of the assets held by a bank and is arrived at by dividing liquid assets
by total assets.


Private Sector Banks
BANK
LA/DD(%) LA/TA(%) G-SEC/T(%)
2008-09 RANK 2008-09 RANK 2008-09 RANK
Axis Bank 73.75 15 12.39 08 18.77 14
Bank of Rajasthan 138.48 09 11.85 09 26.95 03
City Union 167.82 08 12.614 07 21.16 09
Dhanalaxmi 179.89 04 14.69 02 24.59 05
Development
Corporation Bank
132.75 10 14.92 01 20.99 10
Federal Bank 281.19 01 10.41 13 21.28 08
HDFC Bank 89.64 13 13.91 04 28.45 01
ICICI Bank 237.89 06 13.55 06 16.71 15
INDUSIND Bank 106.12 12 11.33 10 22.75 06
Karnataka Bank 168.14 07 8.50 15 25.90 04
Karur Vyasa Bank 120.63 01 10.58 12 22.36 07
Kotak Mahindra Bank 75.61 14 9.00 14 28.39 02
Lakshmi Vilas 232.14 05 13.72 05 20.12 12
SIB 271.08 02 11.24 11 19.85 13
Yes bank 262.62 03 13.99 03 20.44 11




Liquidity is the ability of the bank to meet its financial obligations. A high liquidity
ratio indicates a banks comfort level vis--vis its ability to manage its obligations,
both short-term as well as long-term. Liquidity of a bank can be measured using
metrics such as Liquid Assets (LA) to Total Deposits (TD) and LA to Total Assets
(TA), G-Sec to Total Assets, etc.
In terms of LA/DD ratio, Federal Bank tops the ranking chart among the private
sector banks with a figure of 281.19%. It is followed by Yes Bank. Further analysis
suggests that only two private banks, HDFC Bank and Kotak Mahindra Bank, have
figures in double digits. DCB ranks first on the sub-parameter of LA/TA with a
figure of 14.92%. Dhana Lakshmi Bank and Yes Bank follow.

















Conclusion
With The effect of the crisis subsidizing in the global banking sector, The Indian
banking sector having shown extraordinary financial performance even amidst the
financial crisis.
Since liberalization the Indian banking sector has definitely come a long way. In
the Case of Private Sector banks City Union Bank has outperformed the other
Private Sector Banks.
The Financial Performance in 2008-2009, proves that it is only a matter of time
before the domestic banks foray abroad and with the growing globalization of
Indian businesses through Mergers and Acquisitions, banks need to have global
scale and size to compete effectively with their foreign counterparts, which are
much bigger and efficient. With the support of the regulators Indian Banks have
already started proving that they are really big and competitive.










References


1. Reddy, Maheshwar., Sree, Vijaya R., (2005), Size: An Arbiter of Performance,
Special Issue, Indian Banks Association Bulletin, Indian Banks Association,
(January).
2. Reserve bank of India, Banking Statistics, various years, http://www.rbi.org.in.
3. Reserve Bank of India, Banking Statistics 1972-2002, http://www.rbi.org.in.
4. Reserve Bank of India, Basic Statistical returns of Scheduled Commercial
Banks in India, http://www.rbi.org.in.