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PSGIM CAMELRATING

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Camel Rating
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  EVALUATING BANKS’ PERFORMANCE -CAMEL MODEL   WORLDWIDE financial institutions/Banks are being ranked to review their standing taking into account a few parameters of business. United States Supervisory authorities for the First Time introduced an uniform system of onsite rating for Banking Institutions in 1980. Federal Reserve System, Office of the Comptroller of Currency and Federal Deposit Insurance Corporation in US used CAMEL ratings. CAMEL  stands for: C - C apital Adequacy Ratio A - A sset Quality M - M anagement Effectiveness E - E arnings (profitability) L - L iquidity (asset / liability Management)  EVALUATING BANKS’ PERFORMANCE -CAMEL MODEL  ã Padmanabhan Working Group (1995), constituted by RBI, in India, recommended CAMEL model for Indian Banks also with small changes in rating scale. ã In 1996 the Sixth parameter System and Control  added. ã In India the rating model came into force from July 1997. ã For Foreign Banks operating in India a model   CACS   introduced i.e., C apital adequacy ratio, A sset Quality, C ompliance (of our regulations) and S ystem & Controls ã Objectives: To rate Soundness, financial, managerial and operational efficiency ã To assess Level of risk and financial viability of Banks ã Explicit Assessment of Banks’ ability/performance   ã Over all relative performance of Banks - measured  EVALUATING BANKS’ PERFORMANCE -CAMEL MODEL   ã CAMEL rating is a ‘subjective’ rating model indicating financial strength of Banks weighing the six parameters on a scale of 1 to 100 duly giving weightage for several sub parameters of the main parameters. ã Finally the rating conveys a ‘relative’ position of a bank with reference to another. ã For Indian Banks, the rating symbols assigned are: A to E ã A  –  indicating Sound in All respect ã E - indicating critical financial weaknesses leading to failure in the near term . ã The trigger points indicated are: Capital Adequacy Ratio < than 9%, NPAs over 10% and Return on Assets < 0.25%  EVALUATING BANKS’ PERFORMANCE -CAMEL MODEL   ã Capital adequacy is   rated by applying the following ratios : (among other ratios these are important) ã 1 .CAPITAL ADEQUACY RATIO: ã RATIO OF TIER I & TIER II CAPITAL TO RISK WEIGHED ASSETS ã 2 .DEBT EQUITY RATIO: ã TOTAL OUTSIDE LIABILITY TO NET WORTH. ã 3. COVERAGE RATIO: ã RATIO BETWEEN NET WORTH MINUM NET NPA TO TOTAL ASSETS

Art Knowledge

Jul 23, 2017
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