IJMRR/ May 2013/ Volume 3/Issue 5/Article No-11/2914-2922 ISSN: 2249-7196

INTERNATIONAL JOURNAL OF MANAGEMENT RESEARCH

AND REVIEW

MEASURING PERFORMANCE OF BANKS USING CAMELS MODEL: A

COMPARATIVE STUDY OF CBI AND IB.
Seema Mishra*1, Dr. Kirti Agarwal2
1
Research Scholar, Pacific University, Udaipur, India.
2
Supervisor, Director, ITERC, Ghaziabad, India.
ABSTRACT
The banking sector’s performance is seen as the replica of economic activities of the nation
as a healthy banking system acts as the bedrock of social, economic and industrial growth of
a nation. Banking institutions in our country have been assigned a significant role in
financing the process of planned economic growth Sound financial health of a bank is the
guarantee not only to its depositors but is equally significant for the shareholders, employees
and whole economy as well. As a sequel to this maxim, efforts have been made from time to
time, to measure the financial position of each bank and manage it efficiently and effectively.
In this paper, an effort has been made to evaluate the financial performance of the two major
banks operating in India .This evaluation has been done by using CAMEL Parameters, the
latest model of financial analysis.
Keywords: financial performance, commercial banks, capital Adequacy, asset quality,
management capability, earnings analysis, liquidity analysis.
INTRODUCTION
In this era of liberalization, Privatization and globalization banking sector has become
backbone of Indian economy now a day’s banking sector being an integral part of Indian
financial system has undergone dramatic changes reflecting the ongoing economic and
financial sector reforms. Two decades have elapsed since the initiation of banking sector
reforms in India. Over this period, the banking sector has experienced a paradigm shift.
Hence, it is high time to make performance appraisal of this sector. Accordingly, a
framework for the evaluation of the current strength of the system, and of operations and the
performance of the banks has been provided by Reserve Bank’s measuring rod of ‘CAMELS’
which stands for capital adequacy, assets quality, management efficiency, earning quality,
liquidity and internal control systems. As efficient banking systems contribute in an extensive
way for higher economic growth in any country, studies in this nature are very important for
policy makers, industry leaders and many others who are reliant on the banking sector. The
banking sector has been undergoing a complex, but comprehensive phase of restructuring
since 1991, with a view to make it sound, efficient, and at the same time forging its links
firmly with the real sector for promotion of savings, investment and growth.RBI had set up a
working group headed by Shri.S.Padmanabhan to take fresh look at banking supervision
during 1995. It suggested method for on-site supervision and subsequent rating of banks by
RBI. The committee suggested that supervision of banks should focus on defined parameters
of soundness, financial, managerial and operational efficiency. Accordingly, it recommended
*Corresponding Author www.ijmrr.com 2914
IJMRR/ May 2013/ Volume 3/Issue 5/Article No-11/2914-2922 ISSN: 2249-7196

that the banks should be rated on 5 point scale of A to E, widely on the lines of international
CAMELS rating model. It is considered as the best available methods for evaluating book
performance and healthy position of the bank since it considered all area of banking
operations. The fact that banks work I under the most volatile conditions and the banking
industry as such in the booming phase makes it an interesting subject of study. Amongst these
reforms and restructuring the CAMELS rating system has its own contribution to the way
modern banking is looked up on now. Banking sector has playing vital role in development of
Indian agriculture and industries. At presently Banking has become Important part of
economy & society. Banking industry which was highly regulated in pre-reform period is
reorienting itself to face new challenges emerging in the financial sector globally. Basis
factors responsible for performance of public sectors banks were stringent regulation, poor
recovery process and above all lack of competition.
BANKING SECTOR REFORM
The banking sector reform initiated in 1992 sought to improve the bank efficiency through
entry deregulation, branch delicensing, deregulation of interest rate and allowing the public &
private sector banks to raise the equity capital from the capital market. One of the major
reasons for allowing public sector banks to access capital market is to support the re-
capitalization needs of these banks. The Reserve Bank of India has estimated that given the
present growth rate of the economy and the extent of capital adequacy norms, the public
sector banks would need Rs.100 billion of additional capital in the coming five years (Jalan
2000). The two possible sources of capital infusion are by governmental infusion of funds
and/or allowing the banks to access the capital market.
BANKS IPOs
An initial public offering (IPO) or stock market launch, IPO is the first sale of stock by a
company to the public. One of the major steps in this direction was allowing the public sector
banks to go for IPOs, which would dilute the government ownership and bring these banks
under market discipline. The policy in favor of banks raising capital through IPO was
enacted in 1992. Since then some of the public sector and private banks have gone for IPOs.
The IPO literature, on the other hand points toward presence of underperformance of newly
listed companies in the developed and developing countries. Considering the importance of
sound banking system for resource allocation and smooth functioning of the economy a detail
analysis of pricing and performance of banks that went public over the last decade is of
paramount importance. Many of the public and private sector banks took the IPO route to
collect funds in the 1990s. In view of the evidences of perverse underperformance of the
IPOs in general (as documented in the IPO literature) and considering the importance of the
banking sector in overall development process, this study devotes itself to a detailed analysis
of IPO from the banking sector. The underlying structures of the public sector banks differ
considerably from their private counterpart. So, it is of considerable interest to evaluate the
changes in the public sector banks vis-à-vis their private counterpart(s) in the post IPO era.
OBJECTIVES
The main objectives of the study are as follows :

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IJMRR/ May 2013/ Volume 3/Issue 5/Article No-11/2914-2922 ISSN: 2249-7196

that the banks should be rated on 5 point scale of A to E, widely on the lines of international
CAMELS rating model. It is considered as the best available methods for evaluating book
performance and healthy position of the bank since it considered all area of banking
operations. The fact that banks work I under the most volatile conditions and the banking
industry as such in the booming phase makes it an interesting subject of study. Amongst these
reforms and restructuring the CAMELS rating system has its own contribution to the way
modern banking is looked up on now. Banking sector has playing vital role in development of
Indian agriculture and industries. At presently Banking has become Important part of
economy & society. Banking industry which was highly regulated in pre-reform period is
reorienting itself to face new challenges emerging in the financial sector globally. Basis
factors responsible for performance of public sectors banks were stringent regulation, poor
recovery process and above all lack of competition.
BANKING SECTOR REFORM
The banking sector reform initiated in 1992 sought to improve the bank efficiency through
entry deregulation, branch delicensing, deregulation of interest rate and allowing the public &
private sector banks to raise the equity capital from the capital market. One of the major
reasons for allowing public sector banks to access capital market is to support the re-
capitalization needs of these banks. The Reserve Bank of India has estimated that given the
present growth rate of the economy and the extent of capital adequacy norms, the public
sector banks would need Rs.100 billion of additional capital in the coming five years (Jalan
2000). The two possible sources of capital infusion are by governmental infusion of funds
and/or allowing the banks to access the capital market.
BANKS IPOs
An initial public offering (IPO) or stock market launch, IPO is the first sale of stock by a
company to the public. One of the major steps in this direction was allowing the public sector
banks to go for IPOs, which would dilute the government ownership and bring these banks
under market discipline. The policy in favor of banks raising capital through IPO was
enacted in 1992. Since then some of the public sector and private banks have gone for IPOs.
The IPO literature, on the other hand points toward presence of underperformance of newly
listed companies in the developed and developing countries. Considering the importance of
sound banking system for resource allocation and smooth functioning of the economy a detail
analysis of pricing and performance of banks that went public over the last decade is of
paramount importance. Many of the public and private sector banks took the IPO route to
collect funds in the 1990s. In view of the evidences of perverse underperformance of the
IPOs in general (as documented in the IPO literature) and considering the importance of the
banking sector in overall development process, this study devotes itself to a detailed analysis
of IPO from the banking sector. The underlying structures of the public sector banks differ
considerably from their private counterpart. So, it is of considerable interest to evaluate the
changes in the public sector banks vis-à-vis their private counterpart(s) in the post IPO era.
OBJECTIVES
The main objectives of the study are as follows :

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IJMRR/ May 2013/ Volume 3/Issue 5/Article No-11/2914-2922 ISSN: 2249-7196

(i) to analyse the financial performance of the banks under study;

(ii) to undertake the factors which have led to the current financial performance
RESEARCH METHODOLOGY
For the purpose of the present study, the research instrument used is the CAMEL Model
which is the recent innovation in the area of financial performance evaluation of banks. The
model is explained as under:
CAMEL parameters
This system was adopted in India since 1995 at the suggestion of Mr. Padmanabhan,
Governor RBI. Under this system the rating of individual banks is done along five key
parameters. CAMEL is basically ratio based model for evaluating the performance of banks.
It is a management tool that measures Capital Adequacy, Assets Quality, efficiency of
Management, quality of Earnings and Liquidity of financial institutions. The present study
adopts analytical and descriptive research design. The data of the sample banks for a period
of 2008-2012 have been collected from the annual reports published by the banks. The study
is based on twelve ratios of the variables relating to capital adequacy, assets quality,
management efficiency, earnings quality and liquidity.
Sample of the study
The present study seeks to evaluate the financial performance of the two nationalized bank
(central bank of india and Indian bank) . These two banks were purposely selected for the
study, keeping in view that these two banks released their IPO’s in the same year that is 2007.
Data and tools
The study is mainly based on secondary data drawn from the annual reports of the respective
banks. This data is related to 5 years (2008-2012). For analysis of the data, two important
statistical tools viz. Mean and standard deviation has been used to arrive at conclusions in a
scientific way. The study is primarily based on secondary data. A plethora of data hasbeen
collected from the following sources.
1. IBA-Bulletins annual issues and monthly issues
2 Statistical tables relating to banks in India
3. Reserve Bank of India monthly bulletins and annual reports.
A brief discussion on the ratios considered in the analysis is presented as follows
CAPITAL ADEQUACY
1. Capital Adequacy Ratio (CAR)
2. Debt-Equity ratio (D/E)
3. Coverage ratio
ASSET QUALITY
1. Net NPA / Net advances

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IJMRR/ May 2013/ Volume 3/Issue 5/Article No-11/2914-2922 ISSN: 2249-7196

2. Total investment / Total assets

MANAGEMENT QUALITY
1. Return on net worth
2. Business per Employee
3. Profits per Employee
EARNINGS QUALITY
1. NIM to Total assets
2.Interest income\ Total Income
3. Non Interest income\ Total Income
LIQUIDITY
1. Liquid Assets/Total Deposits
2. Liquid Assets/Total Assets
LITERATURE REVIEW
WORLD WIDE STUDY ON BANK PERFORMANCE
Usman et al (2009) conduct a study on banking efficiency dynamic with financial sector
reforms effect. They took the data set of 20 commercial banks of Pakistan and measure the
efficiency using Data Envelopment Analysis Malmquist productivity index of total factor
productivity (TFP) from 1990-2005. Al-Obaidan(2008) suggest that larger banks are more
efficient then small banks in the gulf region. Jahangir,Shill and Haque (2007) Stated that
the traditional measure of profitability through stockholders equity is quite different in
banking industry from any other sector of business where loan–to-deposit ratio works as very
good indicator of banks profitability as it depicts the status of assts-liability management of
banks. Tarawneh(2006) found that the bank with higher total capital, deposits, credits, or
total assets does not always means that has better profitability performance. Fadxlan Sufian
(2006) applied DEA window analysis approach to examine the long term trend in the
efficiency of 29 Singapore banking group during the period of 1993-2000. X.Chen et all
(2005) applies frontier analysis (X-efficiency) using DEA to examine the cost, technical and
locative efficiency of 43 Chinese banks over the period 1993-2000. Chien-Ta(Bruce)(2004)
Used a new approach of performance evaluation,grey relation analysis(GRA),which is a
concept borrowed from the study of industry and is increasingly applied to commerce.GRA is
used to evaluate the realative performance of three of Australia’s major banks. Maghyereh
(2003) Jordian undertook major financial sector liberalization starting in the early of
1990’s.The effect of these reform on the efficiency of the banking sector is evaluated.
Choudhary (2002) observed that the banking industry of Bangladesh is a mixed one
comprising nationalized, private and foreign commercial banks many efforts have been made
to explain the performance of these banks. Bassett and Brady’s (2002) study found that
small banks grew more rapidly than large banks from 1985-2001 with profitability remains at
a higher level. Siddique and Islam (2001) pointed out that the commercial banks, as a

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whole, are performing well an contributing to the economical development of the country.
Bashir (2000) examines the determinants of Islamic banks performance across eight Middle
Eastern countries from 1993-1998 period. Ruggier (2001,2004)discussed the application of
DEA in education sector, Vassiloglou and Giokas (1990),Zenios et al.(1999) and Rouatt
(2003) discussed various application of DEA in banking sector to improve the performance.
INDIAN STUDIES ON BANK PERFORMANCE
N.Ganeshan Examine the performance (operational efficiency of 30 state cooperative banks
SCB’s in India for the financial year 2002-2003 and 2003-2004.The DEA is used to find the
efficiency of SCB’s. Ashok Nag & Amit Moitra applies the artificial intelligence technique
of self organizing map (SOM) for analyzing the performance trajectory of public sector banks
in India. P.Ganeshan examines the determinants of profitability of PSB’s in India by an
empirical estimation of profit function model. Sangeet & Shubpreet (2006) made an
attempt to review the performance of banking sector in India during post reforms period.
Singh (1990), in his research study titled, “Productivity in Indian Banking Industry”,
discussed the trends and changes in the productivity with particular attention on employee
and branch productivity in the Indian banking industry. Ramamurthy (1998), in his technical
paper on the profitability and productivity in Indian banking stated that the banking structure
and profitability structure of the banking system across the country have a bearing on the
profitability of the banks. When banks are considered as groups in terms of big, medium and
small, bigger banks have greater scope for economies of scale. Kewaljeet (1999) in his
article, “Profitability Performance of Nationalised Banks: Some Issues”, made an attempt to
analyze the profitability performance of State Bank of Patiala keeping in mind the changing
economic reward. Malhotra (1999) in her study, “Banking Sector Reforms: Experience of
PSBs”, has analyzed the performance of PSBs as a result of banking sector reforms. The
study is divided into two parts. In the first part, a brief review of banking reforms has been
made. In the second part, the researcher has discussed the impact of banking sector reforms
on PSBs, after dividing the reform period of 1992-98 into two phases.
STUDIES RELATED TO CAMEL FRAMEWORK
Rao and Datta (1998) made an attempt to derive rating based on CAMEL. In their study,
based on these five groups (C-A-M-E-L), 21 parameters in all were developed. After deriving
separate rating for each parameter, a combined rating was derived for all nationalized banks
(19) for the year 1998. The study found that Corporation Bank has the best rating followed by
Oriental Bank of Commerce, Bank of Baroda, Dena Bank, Punjab National Bank, etc. And
the worst rating was found to be of Indian Bank preceded by UCO Bank, United Bank of
India, Syndicate Bank and Vijaya Bank. Prasuna (2004) analyzed the performance of Indian
banks by adopting the CAMEL Model. The performance of 65 banks was studied for the
period 2003-04. The author concluded that the competition was tough and consumers
benefited from it. Better services quality, innovative products, better bargains are all greeting
the Indian customers. The coming fiscal will prove to be a transition phase of Indian banks,
as they will have to align their strategic focus to increasing interest rates. Veni (2004) studied
the capital adequacy requirement of banks and the measures adopted by them to strengthen
their capital ratios. The author highlighted that the rating agencies give prominence to Capital

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Adequacy Ratios of banks while rating the bank’s certificate of deposits, fixed deposits and
bonds. They normally adopt CAMEL Model for rating banks. Thus, Capital Adequate is
considered as the key element of bank rating. Satish et al. (2005) adopted CAMEL model to
assess the performance of Indian banks. The authors analyzed the performance of 55 banks
for the year 2004-05.using CAMEL Model. They concluded that the Indian banking system
looks sound and Information Technology will help the banking system grow in strength while
going into future. Banks’ initial public offers (IPOs) will be hitting the market to increase
their capital and gearing up for the Basel-II norms. Bodla and Verma (2006), in their paper,
made an attempt to examine and compare the performance of two largest banks of India -
SBI, a public sector bank; and ICICI a private sector bank - through CAMEL Model. Two
supervisory rating models based on CAMEL (Capital Adequacy, Assets Quality,
Management, Earning, Liquidity, Systems and Controls) and CACS (Capital Adequacy,
Assets Quality, Compliance, Systems and Controls) factors for ranking the Indian and foreign
banks have been operating. These models have been worked out on the recommendation of
Padamanabhan Working Group (1995). Satish and Bharathi (2006) revealed that the Indian
banking system has come a long way since independence going through different phases of
nationalization and liberalization and is now preparing itself for the very critical phase.
Globalization. The liberalization phase brought out the best in the industry inducing
competition among banks. During this period, banks were re-structured, shed the flab of over-
employment, embraced technology, ventured into new business and re-branded themselves to
cater over-demanding customers Sisodiya et al. (2007) adopted CAMEL model to assess the
performance of Indian banks. The authors analyzed 67 banks for the year 2006-07. On the
basis of composite ranking of all the selected banks, they selected 10 CAMEL topper banks
under public sector, private sector and foreign banks category. They concluded that with the
buoyancy in the overall economy led by robust corporate performance, the banking sector
reported sterling performance. Sisodiya et al. (2008), in their article titled, “Indian Banking
Industry: Sustaining the Growth Momentum” revealed that the banking sector in India has
once again come out with another fiscal of robust performances. .The authors ranked banks
on the basis of the famous CAMEL (Capital Adequacy, Assets Quality, Management,
Earning and Liquidity) rating. They analyzed 68 banks for the year 2007-08. On the basis of
ranking of each measure of CAMEL Model, they selected five banks under Capital Adequacy
winner (PSU banks), Assets Quality winner (Private sector banks), Management Efficiency
winner (PSU banks), Earning Quality winner (Private sector banks) and Liquidity winner
(PSU banks). Sisodiya and Pemmaraju (2009), in their article said that the Indian banking
has shown remarkable resilience even amidst the worst ever financial catastrophe that hit the
global economy about a year ago and caused the collapse of several financial giants They
have ranked the banks on the basis of CAMEL rating. Banks have been classified into three
categories based on their ownership group, viz. public sector banks (PSBs), private sector
banks and foreign banks. They analyzed 66 banks for the year 2008-09. Maheshwara Reddy
K.V.N.Prasad(2011) In this paper an attempt is made to discuss the financial performance of
selected regional rural banks during post reorganization period. To measure the financial
soundness of selected sample banks, the CAMEL Model which is an appropriate technique is
adopted. Prasad K. V. N(2012) Evaluating Indian banking sector is not an easy task. This
paper evaluate the performance of banking sector by CAMEL model which measures the

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performance of banks from each of the important parameter like Capital Adequacy, Assets
Quality, Management Efficiency, Earning Quality and Liquidity. After deciding the model
this study chosen all public sector banks and thirteen private sector banks for study. Results
shown that there is no significant difference between performance of public and private
sector banks.
STUDIES RELATED TO IPO’S
Jay R. Ritter (1991) was the first to document evidences of underperformance as another
empirical anomaly present in the IPO market. Using a sample of 1526 companies that went
public in U.S.A. during 1975 to1984, he showed that in the long run IPO firms significantly
under-performed as compared to the already listed firms Loughran and Ritter (1995) tried
to address the unresolved issues of Ritter’s (1991) paper and shed more light on the issue of
long run under-performance of IPOs by taking a longer time horizon (1970-90) and found
evidences of perverse underperformance on the basis of stock returns. Jain & Kini (1994),
on the other hand, concentrated on accounting data of IPO firms to evaluate their post issue
operating performance. They found that IPO firms exhibit substantial decline in the post issue
operating performance over a period of six years (extending from the year prior to the IPO).
Another study by Mikkelson et al. (1997) considered a sample of 283 U.S. IPOs in the years
1980-83. Their study also supported the earlier findings and showed that operating
performance of the IPO firms deteriorated in the first ten years after going public. Chun &
Smith (2000) found support of IPO underperformance from an emerging economy, Korea.
Their study showed that profitability declined for the Korean firms in the initial years after
IPO.
RESULT
CAR of CBI is better then IB, Debt\equity ratio should be less so Indian bank is holding it
less then CBI. .In terms of asset quality CBI is better then IB. On the basis of management
quality we can conclude that CBI is managing better then IB. In terms of earning quality IB is
performing better. In terms of liquidity both the banks are comparatively equivalent.
CONCLUSION
Banking sector in Indian has given a positive and encouraging responses to the financial
sector reforms. Entry of new private banks and shaken up Public sector banks to competition.
The financial sector reforms have brought India financial system closer to global standards.
With the India increasingly getting integrated with the global financial world, the Indian
banking sector has a still long way to go to catch up with their counter parts.
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CENTRAL BANK OF INDIA INDIAN BANK

2012 2011 2010 2009 2008 MEAN SD 2012 2011 2010 2009 2008 MEAN SD
CAPITAL ADEQUACY

CAR 12.4 11.64 12.23 13.12 10.42 11.962 1.011 13.47 13.56 13.27 12.86 14.14 13.46 0.466
COVERAGE RATIO 0.1 0.19 1.19 1.13 0.17 0.556 0.553 1.23 1.34 1.36 1.31 1..35 1.31 0.057
DEBT/EQUITY RATIO 22.13 34.13 37.47 37.92 35.8 33.49 6.524 13.12 13.4 13.33 13.32 13.37 13.308 0.110

ASSETS QUALITY

NET NPA/NET ADVANCES 3.09 0.65 0.69 1.24 1.86 1.506 1.013 0.82 0.53 0.23 0.18 0.24 0.4 0.272
TOT.INVEST/TOT.ASSETS 0.25 0.25 0.27 0.29 0.25 0.262 0.018 0.26 0.28 0.27 0.27 0.31 0.278 0.019

MANEGEMENT QUALITY

RETURN ON NET WORTH 4.52 21.45 23.03 14.43 15.46 15.778 7.305 18.57 21.1 22.79 22.03 21.2 21.138 1.591
BUSINESS PER EMPLOYEEE 86.16 83.52 71.18 56.03 40.1 67.398 19.369 111.4 93 76.1 61.7 48.8 78.2 24.811
PROFIT PER EMPLOYEE 0.15 0.4 0.33 0.17 0.16 0.242 0.115 0.93 0.89 0.79 0.62 0.49 0.744 0.186
EARNING QUALITY

NIM/TOT.ASSETS 3.45 2.71 1.54 1.94 1.95 2.318 0.761 3.86 3.62 3.41 3.38 3.24 3.502 0.242
INTEREST INCOME/TOT.INCOME 9.26 8.27 8.21 8.44 7.85 8.406 0.524 9.68 9.01 9.37 8.81 8.46 9.066 0.476
NON INTEREST INCOME/TOTAL INCOME 0.1 0.14 0.21 0.11 0.28 0.168 0.076 0.51 0.49 0.64 0.86 1.06 0.712 0.244

LIQUIDITY

LIQUID ASSETS/TOT.ASSETS 10.6 7.21 11.6 9.09 10.5 9.8 1.702 6.23 7.03 8 7.94 9.6 7.76 1.260
LIQUID ASSETS/TOT.DEPOSITS 9.47 6.41 10.28 8.02 0.09 6.854 4.059 7.29 8.09 9.19 9.2 11.09 8.972 1.431

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