Bank Management

•Bank and Banking

•CAMEL Model
Bank- A bank is a financial institution licensed by a
government to undertake activities like- borrowing and
lending money. A large number of other financial
activities are allowed over time.
Banking- Section 5(1) (b) of the Banking Regulation Act
1949 defines banking as the accepting, for the purpose
of lending or investment of deposits of money from
the public, repayable on demand or otherwise and
withdrawal by cheque, draft, order or otherwise.
Banking Company-Section 5(1) (c) defines banking
company as any company which transacts the business
of banking in India. The banking business as defined in
section 5(b) includes-a) acceptance of deposits from
the public, b) for the purpose of lending or investment,
c) repayable on demand or otherwise, and d)
withdrawal by means of any instrument whether a
cheque or otherwise.
The Indian financial system comprises the following institutions:
1.Commercial banks
a. Public sector
b. Private sector
c. Foreign banks
d. Cooperative institutions
(i) Urban cooperative banks
(ii) State cooperative banks
(iii) Central cooperative banks
2. Financial institutions
a. All-India financial institutions (AIFIs)
b. State financial corporations (SFCs)
c. State industrial development corporations
(SIDCs)
3. Nonbanking financial companies (NBFCs)
4. Capital market intermediaries
Types of banks in India- At present the Banks in
India can be classified as:

Reserve
Bank of India

Public Sector Private Co-operative Regional Foreign

Banks Sector Banks Banks Rural Banks Banks
i. Reserve Bank of India (RBI)-
RBI is the central monetary authority and apex banking
institution in India. As a regulator, it issues guidelines to all
the banks and monitor the overall banking environ in the
country.
ii. Public sector banks-
§ State bank Group with State Bank of India and its 7
associate banks (initially)
§ Nationalized banks
§ Regional rural banks sponsored by public sector banks
iii. Private sector banks-
§ Old generation private banks
§ New generation private banks
§ Foreign banks in India
§ Scheduled co-operative banks
§ Non scheduled banks
iv. Co-operative sector banks
§ State co-operative banks (SCBs)
§ Central co-operative banks (CCBs)
§ Primary Agriculture credit societies (PACS)
§ Land development banks (LDBs)
§ Urban co-operative banks (UCBs)
§ State land development banks (SLDBs)
v. Development banks
§ Export –Import bank of India (EXIM Bank)
§ Industrial Finance Corporation of India (IFCI)
§ Industrial Development bank of India (IDBI)
§ National bank for Agriculture and Rural Development
(NABARD)
§ Industrial Investment bank of India (IIBI)
§ Small Industries development bank of India (SIDBI)
CAMEL Model
In 1995, RBI had set up a working group under the
chairmanship of Shri S. Padmanabhan to review the banking
supervision system and the committee made certain
recommendations. Based on such recommendations a rating
system for domestic and foreign banks based on the
international CAMELS model (combining financial
management, systems and control elements) was introduced
for the inspection cycle commencing from July 1998. It
recommended that the banks should be rated on a five point
scale (1 to 5) based on the lines of international CAMELS
rating model.
The operational efficiency of the banks may be examined
through the CAMEL (Capital adequacy, Asset quality,
Management efficiency, Earnings quality, and Liquidity
position) model. The efficiency parameters in the model are
well defined and embedded in a composite frame to rate the
operating performance as described below:
CAMEL Efficiency Parameters
The numerals in the braces are CAMEL ratings. The number (1) indicates the
highest rating, strongest performance, least degree of supervision concern, and
sound health, while (5) indicates lowest rating, inadequate performance and weak
health of bank and therefore receiving highest degree of supervisory concern. The
efficiency parameters identified in the (CAMEL) model are defined as below:
Sr. Efficiency Measurement Rating (on a five point scale)
No. Parameters Ratios
1 Capital Risk weighted capital less than 5 (5), 6-10 (4), 11-15 (3), 16-
Adequacy to Assets 20 (2), more than 20 (1)
2 Asset NPA to Advances more than 11 (5), 8-10 (4), 5-7 (3), 2–
Quality 4 (2), less than 1 (1)
3 Management Net Profit per less than 1 (5), 1 – 2 (4), 2 – 3 (3), 3 – 4
Efficiency Employee (2), more than 5 (1)
4 Earning Profit to Average 0-0.5 (5), 0.6-1.0 (4), 1.1-1.5 (3), 1.6-
Quality Assets 2.0 (2), more than 2.0 (1)
5 Liquidity Cash to Deposits less than 5 (5), 6 – 9 (4), 10-12 (3), 13-
Position 15 (2), more than 15 (1)
(i) Capital Adequacy (risk weighted capital to assets): It reflects the
financial condition of a bank to meet additional requirement of funds.
It specifies the quality and level of capital required in a bank. The
capital adequacy indicators are rated as per description given below:
CAMEL Model – Capital Adequacy Indicator(s)
Rating
Indicator(s)
1
Strong capital level that adequately support the risk profile.
2
Overall satisfactory level of capital that fairly support the bank’s risk profile
3
Less than satisfactory level of capital that does not fully support the bank’s
risk profile.
4
Deficient level of capital signifying a need for external (additional) capital.
5
Inadequate capital signifying an urgent need for external capital to sustain
the operations.
(ii) Asset quality (NPA to advances): It is judged in terms of potential
credit risk associated with the lending. It is a testing instrument to reflect
the ability of management in discovering and controlling risk. The assets
quality rating is assigned as per the description given below:
CAMEL Model – Asset Quality Indicator(s)
Rating Indicator(s)
1
Strong asset quality and very good credit monitoring and administration.
2
Satisfactory asset quality and credit monitoring and administration.
3
Less than satisfactory level of asset quality to call for improving bank’s
credit administration and risk management practices.
4
Poor credit administration and monitoring signifying an urgent need to
improve risk management for viability of the bank.
5
Critically deficient asset quality severely affecting bank viability.
(iii) Management Efficiency (net profit to employees): It is measured evaluation of
management and is subjective in nature. The net profit per employee is used to suggest
whether the manpower is efficiently utilized by the bank. The management efficiency
rating is assigned as per the description given below:

CAMEL Model – Management Efficiency Indicator(s)

Rating
Indicator(s)
1
Indicates higher efficiency of employees of the bank.
2
Indicates satisfactory levels of efficiency of management that can be improved further.
3
Indicates less than satisfactory level of management efficiency of the bank. There is an
urgent need for the bank to improve on its net profit.
4
Indicates a poor level of management efficiency of the bank. This shows that the bank is
not properly utilizing its manpower and is in serious trouble as far as efficiency of
management is concerned.
5
Indicates a critically deficient management efficiency of bank. This may be due to failure of
the bank to deploy its work force effectively.
(iv) Earnings Quality (net profit after tax to average assets): The earning of a bank
reflects its growth capacity and financial health. The earnings quality of a bank is
measured in terms of return on assets. A higher value of ROA denotes higher
profitability and high CAMEL rating for the bank. The earning quality rating is
assigned as per the description given below:
CAMEL Model – Earnings Quality Indicator(s)
Rating
Indicator(s)
1
Indicates strong earnings quality, more than sufficient to meet its operational and
other expenses, after having sufficient provisions for adequate capital levels.
2
Indicates satisfactory level of earnings quality to maintain adequate capital level
and meet its operational and other expenses.
3
Indicates less than satisfactory level of earnings barely sufficient to meet its
expenses.
4
Indicates poor earnings quality of the bank, not sufficient to meet its expenses.
5
Indicates a critically deficient level of earnings quality and the bank may face the
threat of losing its capital.
(v) Liquidity Position (cash to deposit): Liquidity in a bank implies the cash
position of a bank and ability of a bank to meet its day to day cash needs.
However, sometimes due to various reasons, a bank may suddenly experience
huge withdrawals. In this study, the liquidity of a bank is measured by using cash
to deposit ratio. The liquidity position rating is assigned as per the description
given below:
CAMEL Model – Liquidity Position Indicator(s)
Rating Indicator (s)
1
Indicates strong liquidity level of the bank.
2
Indicates satisfactory liquidity levels and better fund management by the bank.
3
Indicates less than satisfactory level of liquidity position. There is some sense of
weakness with the bank’s fund management practices.
4
Indicates a poor level of liquidity position of the bank. The bank may not be able
to meet present and anticipated sudden withdrawals.
5
Indicates a critically deficient liquidity position, external assistance needed to tide
over the liquidity crunch.
Example for exercise:
Year Capital Asset Mgt.Efficiency Earning Liquidity
Adequacy(%) Quality(%) (Absolute) Quality(%) (%)
1999-00 11.74 0.95 0.027 0.93 3.91
2000-01 11.90 0.87 0.044 1.39 3.82
2001-02 12.7 0.83 0.061 1.73 11.47
2002-03 13.48 0.74 0.066 1.75 8.96
2003-04 5.96 0.58 0.050 1.18 9.59
2004-05 5.58 0.24 0.058 1.22 4.35
2005-06 5.75 0.22 0.062 1.19 5.79
2006-07 4.76 0.34 0.043 0.66 6.55
Composite 8.98 0.59 0.051 1.25 6.81
Score
(CS)