camel framework

7/27/2019 CAMEL FRAMEWORK

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CHAPTER-1

INTRODUCTION

1.1 INTRODUCTION

The word bank means 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 erected in the market-place, where it was customary to exchange money. The

Lombard Jews were the first to practice this exchange business, the first bench having been

established in Italy A.D. 808. Some authorities assert that the Lombard merchants

commenced the business of money-dealing, employing bills of exchange as remittances,

about the beginning of the thirteenth century.

About the middle of the twelfth century it became evident, as the advantage of

coined money was gradually acknowledged, that there must be some controlling power,

some corporation which would undertake to keep the coins that were to bear the royal

stamp up to certain standard of value; as, independently of the sweating which invention

may place to the credit of the ingenuity of the Lombard merchants- all coins will, by wear

or abrasion, become thinner, and consequently less valuable; and it is of the last

importance, not only forth credit of a country, but for the easier regulation of commercial

transactions, that the metallic currency be kept as nearly as possible up to the legal

standard. Much unnecessary trouble and annoyance has been caused formerly by

negligence in this respect. The gradual merging of the business of a goldsmith into a bankappears to have been the way in which banking, as we now understand the term, was

introduced into England; and it was not until long after the establishment of banks in other

countries-for state purposes, the regulation of the coinage, etc. that any large or similar

institution was introduced into England. It is only within the last twenty years that printed


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cheques have been in use in that establishment. First commercial bank was Bank of Venice

which was established in 1157 in Italy.

THE BANKING REFORMS

In 1991, the Indian economy went through a process of economic liberalization,

which was followed up by the initiation of fundamental reforms in the banking sector in

1992. The banking reform package was based on the recommendations proposed by the

Narasimham Committee Report (1991) that advocated a move to a more market oriented

banking system, which would operate in an environment of prudential regulation and

transparent accounting.

One of the primary motives behind this drive was to introduce an element of marketdiscipline into the regulatory process that would reinforce the supervisory effort of the

Reserve Bank of India (RBI). Market discipline, especially in the financial liberalization

phase, reinforces regulatory and supervisory efforts and provides a strong incentive to

banks to conduct their business in a prudent and efficient manner and to maintain adequate

capital as a cushion against risk exposures. Recognizing that the success of economic

reforms was contingent on the success of financial sector reform as well, the government

initiated a fundamental banking sector reform package in 1992.

Banking sector, the world over, is known for the adoption of multidimensional

strategies from time to time with varying degrees of success. Banks are very important for

the smooth functioning of financial markets as they serve as repositories of vital financial

information and can potentially alleviate the problems created by information asymmetries.

From a central banks perspective, such high-quality disclosures help the early detection of

problems faced by banks in the market and reduce the severity of market disruptions.

Consequently, the RBI as part and parcel of the financial sector deregulation, attempted to

enhance the transparency of the annual reports of Indian banks by, among other things,

introducing stricter income recognition and asset classification rules, enhancing the capital

adequacy norms, and by requiring a number of additional disclosures sought by investors to

make better cash flow and risk assessments.


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During the pre economic reforms period, commercial banks & development financial

institutions were functioning distinctly, the former specializing in short & medium term

financing, while the latter on long term lending & project financing. Commercial banks

were accessing short term low cost funds thru savings investments like current accounts,

savings bank accounts & short duration fixed deposits, besides collection float.

Development Financial Institutions (DFIs) on the other hand, were essentially depending

on budget allocations for long term lending at a concessionary rate of interest. The scenario

has changed radically during the post reforms period, with the resolve of the government

not to fund the DFIs through budget allocations. DFIs like IDBI, IFCI & ICICI had posted

dismal financial results. Infect, their very viability has become a question mark. Now, they

have taken the route of reverse merger with IDBI bank & ICICI bank thus converting them

into the universal banking system.

BASEL - II ACCORD

Bank capital framework sponsored by the world's central banks designed to

promote uniformity, make regulatory capital more risk sensitive, and promote enhanced

risk management among large, internationally active banking organizations. The

International Capital Accord, as it is called, will be fully effective by January 2008 for

banks active in international markets. Other banks can choose to "opt in," or they can

continue to follow the minimum capital guidelines in the original Basel Accord, finalized

in 1988. The revised accord (Basel II) completely overhauls the 1988 Basel Accord and is

based on three mutually supporting concepts, or "pillars," of capital adequacy. The first of

these pillars is an explicitly defined regulatory capital requirement, a minimum capital-to-

asset ratio equal to at least 8% of risk-weighted assets. Second, bank supervisory agencies,

such as the Comptroller of the Currency, have authority to adjust capital levels for

individual banks above the 9% minimum when necessary. The third supporting pillar calls

upon market discipline to supplement reviews by banking agencies.

Basel II is the second of the Basel Accords, which are recommendations on banking

laws and regulations issued by the Basel Committee on Banking Supervision. The purpose

of Basel II, which was initially published in June 2004, is to create an international

standard that banking regulators can use when creating regulations about how much capital


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banks need to put aside to guard against the types of financial and operational risks banks

face.

Advocates of Basel II believe that such an international standard can help protect the

international financial system from the types of problems that might arise should a major

bank or a series of banks collapse. In practice, Basel II attempts to accomplish this by

setting up rigorous risk and capital management requirements designed to ensure that a

bank holds capital reserves appropriate to the risk the bank exposes itself to through its

lending and investment practices. Generally speaking, these rules mean that the greater risk

to which the bank is exposed, the greater the amount of capital the bank needs to hold to

safeguard its solvency and overall economic stability.

The final version aims at:1. Ensuring that capital allocation is more risk sensitive;

2. Separating operational risk from credit risk, and quantifying both;

3. Attempting to align economic and regulatory capital more closely to reduce the

scope for regulatory arbitrage.

While the final accord has largely addressed the regulatory arbitrage issue, there are still

areas where regulatory capital requirements will diverge from the economic.

Basel II has largely left unchanged the question of how to actually define bank

capital, which diverges from accounting equity in important respects. The Basel I

definition, as modified up to the present, remains in place.

The Accord in operation

Basel II uses a "three pillars" concept (1) minimum capital requirements

(addressing risk), (2) supervisory review and (3) market discipline to promote greater

stability in the financial system.

The Basel I accord dealt with only parts of each of these pillars. For example: with

respect to the first Basel II pillar, only one risk, credit risk, was dealt with in a simple

manner while market risk was an afterthought; operational risk was not dealt with at all.

The First Pillar

The first pillar deals with maintenance of regulatory capital calculated for three

major components of risk that a bank faces: credit risk, operational risk and market risk.

Other risks are not considered fully quantifiable at this stage.


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The credit risk component can be calculated in three different ways of varying

degree of sophistication, namely standardized approach, Foundation IRB and Advanced

IRB. IRB stands for "Internal Rating-Based Approach".

For operational risk, there are three different approaches - basic indicator approach,

Standardized approach and advanced measurement approach. For market risk the preferred

approach is VAR (value at risk).

As the Basel II recommendations are phased in by the banking industry it will move

from standardized requirements to more refined and specific requirements that have been

developed for each risk category by each individual bank. The upside for banks that do

develop their own bespoke risk measurement systems is that they will be rewarded with

potentially lower risk capital requirements. In future there will be closer links between the

concepts of economic profit and regulatory capital.

Credit Risk can be calculated by using

1. Standardized Approach

2. Foundation IRB (Internal Ratings Based) Approach

3. Advanced IRB Approach

The standardized approach sets out specific risk weights for certain types of credit risk. The

standard risk weight categories are used under Basel 1 and are 0% for short term

government bonds, 20% for exposures to OECD Banks, 50% for residential mortgages

and100% weighting on commercial loans. A new 150% rating comes in for borrowers with

poor credit ratings. The minimum capital requirement (the percentage of risk weighted

assets to be held as capital) has remains at 8%.For those Banks that decide to adopt the

standardized ratings approach they will be forced to rely on the ratings generated by

external agencies. Certain Banks are developing the IRB approach as a result.

The Second Pillar

The second pillar deals with the regulatory response to the first pillar, giving

regulators much improved 'tools' over those available to them under Basel I. It also

provides framework for dealing with all the other risks a bank may face, such as systemic

risk, pension risk, concentration risk, strategic risk, reputation risk, liquidity risk and legal


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risk, which the accord combines under the title of residual risk. It gives banks a power to

review their risk management system.

The Third Pillar

The third pillar greatly increases the disclosures that the bank must make. This is

designed to allow the market to have a better picture of the overall risk position of the bank

and to allow the counterparties of the bank to price and deal appropriately. The new Basel

Accord has its foundation on three mutually reinforcing pillars that allow banks and bank

supervisors to evaluate properly the various risks that banks face and realign regulatory

capital more closely with underlying risks. The first pillar is compatible with the credit risk,

market risk and operational risk. The regulatory capital will be focused on these three risks.

The second pillar gives the bank responsibility to exercise the best ways to manage the risk

specific to that bank. Concurrently, it also casts responsibility on the supervisors to review

and validate banks risk measurement models. The third pillar on market discipline is used

to leverage the influence that other market players can bring. This is aimed at improving

the transparency in banks and improves reporting.

1.2 COMPANY PROFILE

ABOUT INDIAN OVERSEAS BANK

Established on 10th February 1937 by Mr. M. Ct. M. Chidambaram Chettyar,

leader in banking, insurance and industry areas, Indian Overseas Bank (IOB) had the twin

aims of attaining specialization in overseas banking as well as foreign exchange business.

IOB has always been talked about for its excellent presence and services. At the time of

inauguration, IOB started its business in three branches at the same time. The branches

were located at Karaikudi and Chennai in India and Rangoon in Myanmar, erstwhile

Burma. It had a branch in Penang also.

During the time when India became an independent nation, Indian Overseas Bank was

running 38 branches in India and 7 overseas branches. At that point of time, the Deposits of

the bank was Rs.6.64 corer and Advances was Rs.3.23 corer


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IOB received the status of nationalized bank in the year 1969 along with other 13 major

banks. By this time, it had 195 branches. Gradually between the periods 1969 and 1992,

IOB started spreading its wings in foreign destinations like Colombo and Seoul.

IOB was the first bank to receive ISO 9001 Certification from Det Norske Verities (DNV),

Netherlands in the month of September 1999 for its Computer Policy and Planning

Department. Besides, in its journey, it has won many awards and accolades too. These

include:

NABARD's award 2000-2001 for creating maximum number of credit links of Self

Help Groups in comparison to all the other Banks in Tamil Nadu

Best Award under the category of Banking Technology in the year 2001

BRANCH PROFILE (IOBCATHEDRAL)

Cathedral is also one of the important branches in Chennai. In cathedral branch has

more than 28000 account is there and also issuing pension like Chennai co-operation, Port

trust, Govt. Hospitals, railways, MTC, PWD, Tele-communication department etc. this

service is offering from 35years ago. Totally 32 staff working for that the branch, Foreign

exchange dealing is done here. All type of loans is provided here. Locker, DD, BC, gold

coins etc., are the facilities given here. Cathedral branch is CBS type.WORKING HOURS:

In Indian overseas bank working hours is from 9:30AM to 4:30PM.

HEAD OFFICE:

The head office of the Indian overseas bank is located at mount road near Spencer plaza

ADDRESS:

No; 763 Anna salai,

Chennai600002

INDIAN OVERSEAS BANK:

IOB is a one of the major bank based in Chennai with over 1400 domestic branch & 6

branches in Abroad. The bank was established in 1937 to encourage overseas banking for

foreign exchange operation. The bank started simultaneously with 3 branches there are;

Indian overseas bank Chennai


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Indian overseas bank Rangoon

Indian overseas bank Singapore

Indian overseas bank Burma

Indian overseas bank Malaysia

Indian overseas bank Sri lanka

Indian overseas bank Sumatra

In the year 2000 I.O.B engaged India in IPO which brought the Govt. share in the bank

down to 75%.

IOB International expansion

1937-38: As mentioned above, IOB was international from its inception with branches

Indian Overseas Bank Rangoon, Indian Overseas Bank Penang, and Indian Overseas

Bank Singapore.

1941: IOB opened a branch in Malaya that presumably closed almost immediately

because of the war.

1946: IOB opened a branch in Ceylon.

1947: IOB opened a branch in Bangkok and re-opened others.

1948: United Commercial Bank (see below) opened a branch in Malaya.

1949: IOB opened a branch in Bangkok.

1963: The Burmese government nationalized IOB's branch in Rangoon.

1973: IOB, Indian Bank and United Commercial Bank established United Asian Bank

Berhad. (Indian Bank had been operating in Malaysia since 1941 and United

Commercial Bank Limited had been operating there since 1948.) The banks set up

United Asian to comply with the Banking Law in Malaysia, which prohibited foreign

government banks from operating in the country. Also, IOB and six Indian private

banks established Bharat Overseas Bank as a Chennai-based private bank to take over

IOB's Bangkok branch. The Baharat Overseas Bank is the only private bank that the

Reserve Bank of India has permitted to have a branch outside India. The ownership


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was: Indian Overseas Bank (30%), Bank of Rajasthan (16%), Vysya Bank (14.66%),

Federal Bank (19.67%), KarurVysya Bank (10%), South Indian Bank (10%) and

Karnataka Bank (8.67%). Bharat Overseas serves the Indian ethnic community in

Thailand.

1977: IOB opened a branch in Seoul.

1991: Bank of Commerce (BCB), a Malaysian bank, acquired United Asian Bank

(UAB). In 1999 BCB merged with Bank Bumiputra Malaysia to form Bumiputra-

Commerce Bank Berhad.

Indian overseas bank has being operated in Malaysia since 1941, and united

commercial bank limited has been operated since 1948. The bank has being set up unitedAsian company with banking law in Malaysia, which prohibited foreign Govt. Bank from

operating in the county. Also I.O.B and other six bank Indian private bank etc. Bharath

overseas banks as Chennai based private bank to take over I.O.B Bangkok branch. The

bharath overseas bank is the only private bank, which the reserve bank of India has

permitted to have a branch out side India.

The ownership was,

Indian overseas bank (30%)

Bank of Rajasthan (18%)

Vysya bank (14.66%)

Federal bank (19.67)

South Indian bank (10%).

Karnataka bank (8.67%).

Bharath overseas bank the Indian ethic community in Thailand.

In 1977 I.O.B opened a branch in Seoul.

1991 bank of commerce (BCB) a Malaysian bank (U.A.B) in 1999 BCB merged

with bank Brahmaputra Malaysia.


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FUNCTIONS OF INDIAN OVERSEAS BANK

Its accept deposits from the public.

It lends money to the needy people, for having loans, jewels loans & for the

customer durable goods.

Bank issue Cheque.

It deals in the bill of exchange, dies, promissory notes, coupons, draft, and bill of

lending, railway receipts, warrants, certificates, scripts & other securities weather

transferable or negotiable.

It acts as agent for remittance of money on behalf of government, municipality,

local board, Insurance Corporation & other.

It grants & issue letter of credit travelers Cheque& circular notes.

INDIAN BANKS PROFILE

HISTORY

The Indian Bank Limited the predecessor to Indian Bank Managed by Indians on

Western lines in the wake of the widespread misery caused to depositor by the failure of

the house of Messrs.Arbothnet & Co in the year 1906. The late Honble

Shri.V.Krishnaswamy Iyer CSI conceived the idea of starting of bank of Chennai and

called a meeting of prominent citizens on November 3, 1906. The Indian Bank Limited

commenced services on 15th August 1907 exactly forty years before India political

freedom on August 1947.

A PREMIER BANK OWNED BY THE GOVERNMENT OF INDIA

Established on 15th August 1907 as part of the Swedish movement

Serving the nation with a team of over 18782 dedicated staff

Total Business crossed Rs.2, 11,988 Crores as on 31.03.2012

Operating Profit increased to Rs. 3,463.17 Crores as on 31.03.2012

Net Profit increased to Rs.1746.97 Crores as on 31.03.2012


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Core Banking Solution (CBS) in all 2089 branches as on 31/03/2013

INTERNATIONAL PRESENCE

Overseas branches in Singapore, Colombo including a Foreign Currency BankingUnit at Colombo and Jaffna

240 Overseas Correspondent banks in 70 countries

DIVERSIFIED BANKING ACTIVITIES -2 SUBSIDIARY COMPANIES

Indbank Merchant Banking Services Ltd

IndBank Housing Ltd.

A FRONT RUNNER IN SPECIALIZED BANKING 97 Forex Authorized branches inclusive of 1 Specialised Overseas Branch at

Chennai exclusively for handling forex transactions arising out of Export, Import,

Remittances and Non Resident Indian business

73 Special SME Branches extending finance exclusively to SSI units

Established MSME CPUs at 9 key centers at Chennai, Mumbai, Kolkata, New

Delhi, Ahmedabad, Bangalore, Pune, Coimbatore and Kancheepuram.

MoU entered with National Small Industries Corporation (NSIC) to focus on

MSME Segment

LEADERSHIP IN RURAL DEVELOPMENT

Under Financial Inclusion Plan, Indian Bank has been allotted with 1523 villages

with population above 2000 ,all the 1523 villages have been provided with banking

services as on 30thSeptember 2012 as below:

* 1425 villages through Smart card based Business Correspondent (BC) Model

* 53 villages through Brick and mortar branches /Banking Service Centres (BSCs)

* 45 villages through Mobile Branch/Van

Pioneer in introducing Self Help Groups and Financial Inclusion Project in the

country

Award winner for Excellence in Agricultural Lending from Honourable Union

Minister for Finance


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Best Performer Award for Micro-Finance activities in Tamil Nadu and Union

Territory of Puducherry from NABARD

Established 45 specialized exclusive Microfinance branches called "Microsate"

across the country to cater the needs of Urban poor through SHG (Self Help

Group)/JLG (Joint Liability Group) concepts

A special window for Micro finance viz., Micro Credit Kendras are functioning in

44 Rural/Semi Urban branches

Harnessing ICT (Information and Communication Technology) for Rural

Development and Inclusive Banking

Provision of technical assistance and project reports in Agriculture to

entrepreneurs through Agricultural Consultancy & Technical Services (ACTS)

A PIONEER IN INTRODUCING THE LATEST TECHNOLOGY IN BANKING

100% Core Banking Solution(CBS) Branches

100% Business Computerisation

1322 Automated Teller Machines(ATM)

24 x 7 Service through more than 99242 ATMs under shared network

Internet and Tele Banking services to all Core Banking customers

e-payment facility for Corporate customers

Cash Management Services

Depository Services

Reuter Screen, Telerate, Reuter Monitors, Dealing System provided at Overseas

Branch, Chennai

I B Credit Card Launched

I B Gold Coin

I B Prepaid Cards Launched (GIFT Card, International Travel Card)


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CHAPTER-2

REVIEW OF LITERATURE

2.1 CONCEPTUAL REVIEW

CAMEL FRAMEWORK

C CAPITAL ADEQUACY

A ASSET QUALITY

M MANAGEMENT

E EARNINGS

L LIQUIDITY

2.1.1 CAPITAL ADEQUACY

It is important for a bank to maintain depositors confidence and preventing the bank from

going bankrupt. It reflects the overall financial condition of banks and also the ability of

management to meet the need of additional capital. The following ratios measure capital

adequacy:

Capital Adequacy Ratio (CAR): The capital adequacy ratio is developed to ensure

that banks can absorb a reasonable level of losses occurred due to operational losses

and determine the capacity of the bank in meeting the losses. As per the latest RBInorms, the banks should have a CAR of 9 per cent.

Debt-Equity Ratio (D/E): This ratio indicates the degree of leverage of a bank. It

indicates how much of the bank business is financed through debt and how much

through equity.

Advance to Assets Ratio (Adv/Ast): This is the ratio indicates a banks

aggressiveness in lending which ultimately results in better profitability.

Government Securities to Total Investments (G-sec/Inv): It is an important

indicator showing the risk-taking ability of the bank. It is a banks strategy to have

high profits, high risk or low profits, low risk.


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2.1.2 ASSETS QUALITY

The quality of assets is an important parameter to gauge the strength of bank. The prime

motto behind measuring the assets quality is to ascertain the component of non-performing

assets as a percentage of the total assets. The ratios necessary to assess the assets qualityare:

Net NPAs to Total Assets (NNPAs/TA): This ratio discloses the efficiency of

bank in assessing the credit risk and, to an extent, recovering the debts.

Net NPAs to Net Advances (NNPAs/NA): It is the most standard measure of

assets quality measuring the net non-performing assets as a percentage to net

advances.

Total Investments to Total Assets (TI/TA): It indicates the extent of deploymentof assets in investment as against advances.

Percentage Change in NPAs: This measure tracks the movement in Net NPAs

over previous year. The higher the reduction in the Net NPA level, the better it for

the bank.

2.1.3 MANAGEMENT EFFICIENCY

Management efficiency is another important element of the CAMEL Model. The ratio in

this segment involves subjective analysis to measure the efficiency and effectiveness ofmanagement. The ratios used to evaluate management efficiency are described as:

Total Advances to Total Deposits (TA/TD): This ratio measures the efficiency

and ability of the banks management in converting the deposits available with the

bank excluding other funds like equity capital, etc. into high earning advances.

Profit per Employee (PPE): This shows the surplus earned per employee. It is

known by dividing the profit after tax earned by the bank by the total number of

employees.

Business per Employee (BPE): Business per employee shows the productivity of

human force of bank. It is used as a tool to measure the efficiency of employees of a

bank in generating business for the bank.


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Return on Net worth (RONW): It is a measure of the profitability of a bank. Here,

PAT is expressed as a percentage of Average Net Worth.

2.1.4 EARNING QUALITY

The quality of earnings is a very important criterion that determines the ability of a bank to

earn consistently. It basically determines the profitability of bank and explains its

sustainability and growth in earnings in future. The following ratios explain the quality of

income generation.

Operating Profit to Average Working Funds (OP/AWF): This ratio indicates

how much a bank can earn profit from its operations for every rupee spent in the

form of working fund.

Percentage Growth in Net Profit (PAT Growth):

It is the percentage change in

net profit over the previous year.

Net Profit to Average Assets (PAT/AA): This ratio measures return on assets

employed or the efficiency in utilization of assets.

2.1.5 LIQUIDITY

Risk of liquidity is curse to the image of bank. Bank has to take a proper care to hedge the

liquidity risk; at the same time ensuring good percentage of funds are invested in high

return generating securities, so that it is in a position to generate profit with provision

liquidity to the depositors. The following ratios are used to measure the liquidity:

Liquid Assets to Demand Deposits (LA/DD): This ratio measures the ability of

bank to meet the demand from depositors in a particular year. To offer higher

liquidity for them, bank has to invest these funds in highly liquid form.

Liquid Assets to Total Deposits (LA/TD): This ratio measures the liquidity

available to the total deposits of the bank.

Liquid Assets to Total Assets (LA/TA): It measures the overall liquidity position

of the bank. The liquid asset includes cash in hand, balance with institutions and

money at call and short notice. The total assets include the revaluation of all the

assets.


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2.2 RESEARCH REVIEW

In the process of continuous evaluation of the banks financialperformance both in

public sector and private sector, the academicians, scholars and administrators have made

several studies on the CAMEL model but in different perspectives and in different periods.

1. CAMEL rating system (Keeley and Gilbert)

This study uses the capital adequacy component of the CAMEL rating system to

assess whether regulators in the 1980s influenced inadequately capitalized banks to

improve their capital. Using a measure of regulatory pressure that is based on publicly

available information, he found that inadequately capitalized banks responded to regulators'

demands for greater capital. This conclusion is consistent with that reached by Keeley

(1988).

Yet, a measure of regulatory pressure based on confidential capital adequacy ratings

reveals that capital regulation at national banks was less effective than at state-chartered

banks. This result strengthens a conclusion reached by Gilbert (1991)

2. Banks performance evaluation by CAMEL model (Hirtle and Lopez)

Despite the continuous use of financial ratios analysis on banks performance

evaluation by banks' regulators, opposition to it skill thrive with opponents coming up with

new tools capable of flagging the over-all performance ( efficiency) of a bank. This

research paper was carried out; to find the adequacy of CAMEL in capturing the overall

performance of a bank; to find the relative weights of importance in all the factors in

CAMEL; and lastly to inform on the best ratios to always adopt by banks regulators in

evaluating banks efficiency.

3. CAMEL model examination (Rebel Cole and Jeffery Gunther)

To assess the accuracy of CAMEL ratings in predicting failure, Rebel Cole and Jeffery

Gunther use as a benchmark an off-site monitoring system based on publicly available

accounting data. Their findings suggest that, if a bank has not been examined for more than

two quarters, off-site monitoring systems usually provide a more accurate indication of

survivability than its CAMEL rating. The lower predictive accuracy for CAMEL ratings

older" than two quarters causes the overall accuracy of CAMEL ratings to fall

substantially below that of off-site monitoring systems.


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The higher predictive accuracy of off-site systems derives from both their timeliness-an

updated off-site rating is available for every bank in every quarter-and the accuracy of the

financial data on which they are based. Cole and Gunther conclude that off-site monitoring

systems should continue to play a prominent role in the supervisory process, as a

complement to on-site examinations.

4. Check the Risk taken by banks by CAMEL model

The de-regulation of the U.S. banking industry has fostered increased competition

in banking markets, which in turn has created incentives for banks to operate more

efficiently and take more risk. They examine the degree to which supervisory CAMEL

ratings reflect the level of risk taken by banks and the risk-taking efficiency of those banks

(i.e., whether increased risk levels generate higher expected returns). Their results suggest

that supervisors not only distinguish between the risk-taking of efficient and inefficient

banks, but they also permit

efficient banks more latitude in their investment strategies than inefficient banks.

5. Bank soundness - CAMEL ratings Indonesia (Kenton Zumwalt)

This study uses a unique data set provided by Bank Indonesia to examine the

changing financial soundness of Indonesian banks during this crisis. Bank Indonesia's non-

public CAMEL ratings data allow the use of a continuous bank soundness measure rather

than ordinal measures. In addition, panel data regression procedures that allow for the

identification of the appropriate statistical model are used. They argue the nature of the

risks facing the Indonesian banking community calls for the addition of a systemic risk

component to the Indonesian ranking system. The empirical results show that during

Indonesia's stable economic periods, four of the five traditional CAMEL components

provide insights into the financial soundness of Indonesian banks.

However, during Indonesia's crisis period, the relationships between financial

Characteristics and CAMEL ratings deteriorate and only one of the traditional CAMEL

componentsearningsobjectively discriminates among the ratings.


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6. CAMELs and Banks Performance Evaluation (Muhammad Tanko)

Despite the continuous use of financial ratios analysis on banks performance evaluation by

banks' regulators, opposition to it skill thrive with opponents coming up with new tools

capable of flagging the over-all performance ( efficiency) of a bank. This research paper

was carried out; to find the adequacy of CAMEL in capturing the overall performance of a

bank; to find the relative weights of importance in all the factors in CAMEL; and lastly to

inform on the best ratios to always adopt by banks regulators in evaluating banks

efficiency. The data for the research work is secondary and was collected from the annual

reports of eleven commercial banks in Nigeria over a period of nine years (1997 - 2005).

The purposive sampling technique was used. The findings revealed the inability of each

factor in CAMEL to capture the holistic performance of a bank. Also revealed, was the

relative weight of importance of the factors in CAMEL which resulted to a call for a

change in the acronym of CAMEL to CLEAM. In addition, the best ratios in each of the

factors in CAMEL were identified. The paper concluded that no one factor in CAMEL

suffices to depict the overall performance of a bank. Among other recommendations,

banks' regulators are called upon to revert to the best identified ratios in CAMEL when

evaluating banks performance.

When we were searching for the research paper for literature review, we could not

find a single report or any research paper on the CAMELS model prepared on

Indian Banks. Though it may be prepared by them but we have not found. So we

inspired to make the project report on CAMELS Model especially on Indian Banks.


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CHAPTER-3

CAMEL FRAMWORK

3.1 CAMELS FRAMEWORK

During an on-site bank exam, supervisors gather private information, such as details

on problem loans, with which to evaluate a bank's financial condition and to monitor its

compliance with laws and regulatory policies. A key product of such an exam is a

supervisory rating of the bank's overall condition, commonly referred to as CAMELS

rating.

The acronym "CAMEL" refers to the five components of a bank's condition that are

assessed: Capital adequacy, Asset quality, Management, Earnings, and Liquidity. A sixth

component, a bank's Sensitivity to market risk was added in 1997; hence the acronym was

changed to CAMELS.

A CAMEL is basically a ratio-based model for evaluating the performance of banks.

Various ratios forming this model are explained below:

3.1.1 CAPITAL ADEQUACY

Capital base of financial institutions facilitates depositors in forming their risk

perception about the institutions. Also, it is the key parameter for financial managers to

maintain adequate levels of capitalization. Moreover, besides absorbing unanticipated

shocks, it signals that the institution will continue to honor its obligations. The most widely

used indicator of capital adequacy is capital to risk-weighted assets ratio (CRWA).

According to Bank Supervision Regulation Committee (The Basle Committee) of Bank for

International Settlements, a minimum 9 percent CRWA is required.

Capital adequacy ultimately determines how well financial institutions can cope

with shocks to their balance sheets. Thus, it is useful to track capital-adequacy ratios that

take into account the most important financial risksforeign exchange, credit, and interest

rate risksby assigning risk weightings to the institutions assets.

A sound capital base strengthens confidence of depositors. This ratio is used to protect

depositors and promote the stability and efficiency of financial systems around the world.

The following ratios measure capital adequacy:


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a) Capital Risk Adequacy Ratio:

CRAR is a ratio of Capital Fund to Risk Weighted Assets. Reserve Bank of India

prescribes Banks to maintain a minimum Capital to risk-weighted Assets Ratio (CRAR) of

9 % with regard to credit risk, market risk and operational risk on an ongoing basis, as

against 8 % prescribed in Basel documents.

Total capital includes tier-I capital and Tier-II capital. Tier-I capital includes paid

up equity capital, free reserves, intangible assets etc. Tier-II capital includes long term

unsecured loans, loss reserves, hybrid debt capital instruments etc. The higher the CRAR,

the stronger is considered a bank, as it ensures high safety against bankruptcy.

CRAR = Capital/ Total Risk Weighted Credit Exposure

b) Debt Equity Ratio:

This ratio indicates the degree of leverage of a bank. It indicates how much of the

bank business is financed through debt and how much through equity. This is calculated as

the proportion of total asset liability to net worth. Outside liability includes total

borrowing, deposits and other liabilities. Net worth includes equity capital and reserve

and surplus.

Higher the ratio indicates less protection for the creditors and depositors in the

banking system.

Borrowings/ (Share Capital + reserves)

c) Total Advance to Total Asset Ratio:

This is the ratio of the total advanced to total asset. This ratio indicates banks

Aggressiveness in lending which ultimately results in better profitability. Higher ratio of

advances of bank deposits (assets) is preferred to a lower one. Total advances also include

receivables. The value of total assets is excluding the revolution of all the assets.

Total Advances/ Total Asset

d) Government Securities to Total Investments:

The percentage of investment in government securities to total investment is a very

important indicator, which shows the risk taking ability of the bank. It indicates a banks

strategy as being high profit high risk or low profit low risk. It also gives a view as to the


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availability of alternative investment opportunities. Government securities are generally

considered as the most safe debt instrument, which, as a result, carries the lowest return.

Since government securities are risk free, the higher the government security to investment

ratio, the lower the risk involved in a banks investments.

Government Securities/ Total Investment

3.1.2 ASSET QUALITY

Asset quality determines the healthiness of financial institutions against loss of

value in the assets. The weakening value of assets, being prime source of banking

problems, directly pour into other areas, as losses are eventually written-off against capital,

which ultimately expose the earning capacity of the institution. With this backdrop, the

asset quality is gauged in relation to the level and severity of non-performing assets,

adequacy of provisions, recoveries, distribution of assets etc. Popular indicators include

nonperforming loans to advances, loan default to total advances, and recoveries to loan

default ratios.

The solvency of financial institutions typically is at risk when their assets become

impaired, so it is important to monitor indicators of the quality of their assets in terms of

overexposure to specific risks, trends in nonperforming loans, and the health and

profitability of bank borrowersespecially the corporate sector. Share of bank assets in

the aggregate financial sector assets: In most emerging markets, banking sector assets

comprise well over 80 per cent of total financial sector assets, whereas these figures are

much lower in the developed economies. Furthermore, deposits as a share of total bank

liabilities have declined since 1990 in many developed countries, while in developing

countries public deposits continue to be dominant in banks. In India, the share of banking

assets in total financial sector assets is around 75 per cent, as of end-March 2008. There is,

no doubt, merit in recognizing the importance of diversification in the institutional and

instrument-specific aspects of financial intermediation in the interests of wider choice,

competition and stability. However, the dominant role of banks in financial intermediation

in emerging economies and particularly in India will continue in the medium-term; and the

banks will continue to be special for a long time.


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In this regard, it is useful to emphasize the dominance of banks in the developing

countries in promoting non-bank financial intermediaries and services including in

development of debt-markets. Even where role of banks is apparently diminishing in

emerging markets, substantively, they continue to play a leading role in non-banking

financing activities, including the development of financial markets.

One of the indicators for asset quality is the ratio of non-performing loans to total loans.

Higher ratio is indicative of poor credit decision-making.

NPA: NON-PERFORMING ASSETS:

Advances are classified into performing and non-performing advances (NPAs) as

per RBI guidelines. NPAs are further classified into sub-standard, doubtful and loss assets

based on the criteria stipulated by RBI. An asset, including a leased asset, becomes

nonperforming when it ceases to generate income for the Bank.

An NPA is a loan or an advance where:

1. Interest and/or installment of principal remains overdue for a period of more than

90days in respect of a term loan;

2. The account remains "out-of-order'' in respect of an Overdraft or Cash Credit

(OD/CC);

3. The bill remains overdue for a period of more than 90 days in case of billspurchased and discounted;

4. A loan granted for short duration crops will be treated as an NPA if the

installments of principal or interest thereon remain overdue for two crop seasons;

and

5. A loan granted for long duration crops will be treated as an NPA if the

Installments of principal or interest thereon remain overdue for one crop season.

The Bank classifies an account as an NPA only if the interest imposed during any quarter is

not fully repaid within 90 days from the end of the relevant quarter. This is a key to the

stability of the banking sector. There should be no hesitation in stating that Indian banks

have done a remarkable job in containment of non-performing loans (NPL) considering the

overhang issues and overall difficult environment.


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The following ratios are necessary to assess the asset quality.

a) Gross NPA ratio:

This ratio is used to check whether the bank's gross NPAs are increasing quarter on quarter

or year on year. If it is, indicating that the bank is adding a fresh stock of bad loans. It

would mean the bank is either not exercising enough caution when offering loans or is too

lax in terms of following up with borrowers on timely repayments.

Gross NPA/ Total Loan

b) Net NPA ratio:

Net NPAs reflect the performance of banks. A high level of NPAs suggests high

probability of a large number of credit defaults that affect the profitability and net-worth of

banks and also wear down the value of the asset.

Loans and advances usually represent the largest asset of most of the banks. It monitors the

quality of the banks loan portfolio. The higher the ratio, the higher the credits risk.

Net NPA/ Total Loan

3.1.3 MANAGEMENT

Management of financial institution is generally evaluated in terms of capital adequacy,

asset quality, earnings and profitability, liquidity and risk sensitivity ratings. In addition,

performance evaluation includes compliance with set norms, ability to plan and react to

changing circumstances, technical competence, leadership and administrative ability.

Sound management is one of the most important factors behind financial institutions

performance. Indicators of quality of management, however, are primarily applicable to

individual institutions, and cannot be easily aggregated across the sector. Furthermore,

given the qualitative nature of management, it is difficult to judge its soundness just by

looking at financial accounts of the banks.

Nevertheless, total advance to total deposit, business per employee and profit per employee

helps in gauging the management quality of the banking institutions. Several indicators,

however, can jointly serveas, for instance, efficiency measures doas an indicator of

management soundness. The ratios used to evaluate management efficiency are described

as under:


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a) Total Advance to Total Deposit Ratio:

This ratio measures the efficiency and ability of the banks management in converting the

deposits available with the banks (excluding other funds like equity capital, etc.) into high

earning advances. Total deposits include demand deposits, saving deposits, term deposit

and deposit of other bank. Total advances also include the receivables.

Total Advance/ Total Deposit

b) Business per Employee:

Revenue per employee is a measure of how efficiently a particular bank is utilizing its

employees. Ideally, a bank wants the highest business per employee possible, as it denotes

higher productivity. In general, rising revenue per employee is a positive sign that suggests

the bank is finding ways to squeeze more sales/revenues out of each of its employee.

Total Income/ No. of Employees

c) Profit per Employee:

This ratio shows the surplus earned per employee. It is arrived at by dividing profit after

tax earned by the bank by the total number of employee. The higher the ratio shows good

efficiency of the management.

Profit after Tax/ No. of Employees

3.1.4 EARNING & PROFITABILITY

Earnings and profitability, the prime source of increase in capital base, is examined with

regards to interest rate policies and adequacy of provisioning. In addition, it also helps to

support present and future operations of the institutions. The single best indicator used to

gauge earning is the Return on Assets (ROA), which is net income after taxes to total asset

ratio.

Strong earnings and profitability profile of banks reflects the ability to support present and

future operations. More specifically, this determines the capacity to absorb losses, finance

its expansion, pay dividends to its shareholders, and build up an adequate level of capital.

Being front line of defense against erosion of capital base from losses, the need for high

earnings and profitability can hardly be overemphasized. Although different indicators

aroused to serve the purpose, the best and most widely used indicator is Return on Assets

(ROA).


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However, for in-depth analysis, another indicator Interest Income to Total Income and

Other income to Total Income is also in used. Compared with most other indicators, trends

in profitability can be more difficult to interpretfor instance, unusually high profitability

can reflect excessive risk taking. The following ratios try to assess the quality of income in

terms of income generated by core activityincome from landing operations.

a) Dividend Payout Ratio:

Dividend payout ratio shows the percentage of profit shared with the shareholders.

The more the ratio will increase the goodwill of the bank in the share market.

Dividend/ Net profit

b) Return on Asset:

Net profit to total asset indicates the efficiency of the banks in utilizing their assets

in generating profits. A higher ratio indicates the better income generating capacity of the

assets and better efficiency of management in future.

Net Profit/ Total Asset

c) Operating Profit by Average Working Fund:

This ratio indicates how much a bank can earn from its operations net of the

operating expenses for every rupee spent on working funds. Average working funds are the

total resources (total assets or total liabilities) employed by a bank. It is daily average oftotal assets/ liabilities during a year. The higher the ratio, the better it is. This ratio

determines the operating profits generated out of working fund employed. The better

utilization of the funds will result in higher operating profits. Thus, this ratio will indicate

how a bank has employed its working funds in generating profits.

Operating Profit/ Average Working Fund

d) Net Profit to Average Asset:

Net profit to average asset indicates the efficiency of the banks in utilizing their

assets in generating profits. A higher ratio indicates the better income generating capacity

of the assets and better efficiency of management. It is arrived at by dividing the net profit

by average assets, which is the average of total assets in the current year and previous year.


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Thus, this ratio measures the return on assets employed. Higher ratio indicates better

earning potential in the future.

Net Profit/ Average Asset

e) Interest Income to Total Income:

Interest income is a basic source of revenue for banks. The interest income total income

indicates the ability of the bank in generating income from its lending. In other words, this

ratio measures the income from lending operations as percentage of the total income

generated by the bank in a year. Interest income includes income on advances, interest on

deposits with the RBI, and dividend income.

Interest Income/ Total Income

f) Other Income to Total Income:

Fee based income account for a major portion of the banks other income. The bank

generates higher fee income through innovative products and adapting the technology for

sustained service levels. The higher ratio indicates increasing proportion of fee-based

income. The ratio is also influenced by gains on government securities, which fluctuates

depending on interest rate movement in the economy.

Other Income/ Total Income

3.1.5 LIQUIDITY

An adequate liquidity position refers to a situation, where institution can obtain

sufficient funds, either by increasing liabilities or by converting its assets quickly at a

reasonable cost. It is, therefore, generally assessed in terms of overall assets and liability

management, as mismatching gives rise to liquidity risk. Efficient fund management refers

to a situation where a spread between rate sensitive assets (RSA) and rate sensitive

liabilities (RSL) is maintained. The most commonly used tool to evaluate interest rate

exposure is the Gap between RSA and RSL, while liquidity is gauged by liquid to total

asset ratio.

Initially solvent financial institutions may be driven toward closure by poor management of

short-term liquidity. Indicators should cover funding sources and capture large maturity


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mismatches. The term liquidity is used in various ways, all relating to availability of,

access to, or convertibility into cash. An institution is said to have liquidity if it can easily

meet its needs for cash either because it has cash on hand or can otherwise raise or borrow

cash. A market is said to be liquid if the instruments it trades can easily be bought or sold

in quantity with little impact on market prices. An asset is said to be liquid if the market for

that asset is liquid.

The common theme in all three contexts is cash. A corporation is liquid if it has ready

access to cash. A market is liquid if participants can easily convert positions into cashor

conversely. An asset is liquid if it can easily be converted to cash.

The liquidity of an institution depends on:

The institution's short-term need for cash;

Cash on hand;

Available lines of credit;

The liquidity of the institution's assets;

The institution's reputation in the marketplacehow willing will counterparty is to

transact trades with or lend to the institution?

The ratios suggested to measure liquidity under CAMELS Model are as follows:

a) Liquidity Asset to Total Asset:

Liquidity for a bank means the ability to meet its financial obligations as they come

due. Bank lending finances investments in relatively illiquid assets, but it fund its loans

with mostly short term liabilities. Thus one of the main challenges to a bank is ensuring its

own liquidity under all reasonable conditions. Liquid assets include cash in hand, balance

with the RBI, balance with other banks (both in India and abroad), and money at call and

short notice. Total asset include the revaluations of all the assets. The proportion of liquid

asset to total asset indicates the overall liquidity position of the bank.

Liquidity Asset/ Total Asset

b) Government Securities to Total Asset:

Government Securities are the most liquid and safe investments. This ratio

measures the government securities as a proportion of total assets. Banks invest in


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government securities primarily to meet their SLR requirements, which are around 25% of

net demand and time liabilities. This ratio measures the risk involved in the assets hand by

a bank.

Government Securities/ Total Asset

c) Approved Securities to Total Asset:

Approved securities include securities other than government securities. This ratio

measures the Approved Securities as a proportion of Total Assets. Banks invest in

approved securities primarily after meeting their SLR requirements, which are around 25%

of net demand and time liabilities. This ratio measures the risk involved in the assets hand

by a bank.

Approved Securities/ Total Asset

d) Liquidity Asset to Demand Deposit:

This ratio measures the ability of a bank to meet the demand from deposits in a particular

year. Demand deposits offer high liquidity to the depositor and hence banks have to invest

these assets in a highly liquid form.

Liquidity Asset/ demand Deposit

e) Liquidity Asset to Total Deposit:

This ratio measures the liquidity available to the deposits of a bank. Total deposits include

demand deposits, savings deposits, term deposits and deposits of other financial

institutions.

Liquid assets include cash in hand, balance with the RBI, balance with other banks (both in

India and abroad), and money at call and short notice.

Liquidity Asset/ Total Deposit

3.1.6 SENSITIVITY TO MARKET RISK

It refers to the risk that changes in market conditions could adversely impact earnings

and/or capital. Market Risk encompasses exposures associated with changes in interstates,

foreign exchange rates, commodity prices, equity prices, etc. While all of these items are

important, the primary risk in most banks is interest rate risk (IRR), which will be the focus


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of this module. The diversified nature of bank operations makes them vulnerable to various

kinds of financial risks. Sensitivity analysis reflects institutions exposure to interstate risk,

foreign exchange volatility and equity price risks (these risks are summed in market risk).

Risk sensitivity is mostly evaluated in terms of managements ability to monitor and

control market risk. Banks are increasingly involved in diversified operations, all of which

are subject to market risk, particularly in the setting of interest rates and the carrying out of

foreign exchange transactions. In countries that allow banks to make trades in stock

markets or commodity exchanges, there is also a need to monitor indicators of equity and

commodity price risk.

Interest Rate Risk Basics:

In the most simplistic terms, interest rate risk is a balancing act. Banks are trying to

balance the quantity of reprising assets with the quantity of reprising liabilities. For

example, when a bank has more liabilities reprising in a rising rate environment than assets

reprising, the net interest margin (NIM) shrinks. Conversely, if your bank is asset sensitive

in a rising interest rate environment, your NIM will improve because you have more assets

repricing at higher rates.

Liquidity risk is financial risk due to uncertain liquidity. An institution might lose

liquidity if its credit rating falls, it experiences sudden unexpected cash outflows, or some

other event causes counterparties to avoid trading with or lending to the institution. A firm

is also exposed to liquidity risk if markets on which it depends are subject to loss of

liquidity.

Liquidity risk tends to compound other risks. If a trading organization has a position

in an illiquid asset, its limited ability to liquidate that position at short notice will

compound its market risk. Suppose a firm has offsetting cash flows with two different

counterparties on a given day. If the counterparty that owes it a payment defaults, the firm

will have to raise cash from other sources to make its payment. Should it be unable to do

so, it too we default.

Here, liquidity risk is compounding credit risk.

Accordingly, liquidity risk has to be managed in addition to market, credit and other

risks. Because of its tendency to compound other risks, it is difficult or impossible to

isolate liquidity risk. In all but the most simple of circumstances, comprehensive metrics of


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liquidity risk don't exist. Certain techniques of asset-liability management can be applied to

assessing liquidity risk. If an organization's cash flows are largely contingent, liquidity risk

may be assessed using some form of scenario analysis. Construct multiple scenarios for

market movements and defaults over a given period of time. Assess day-today cash flows

under each scenario. Because balance sheets differed so significantly from one organization

to the next, there is little standardization in how such analyses are implemented.

Regulators are primarily concerned about systemic implications of liquidity risk.

Business activities entail a variety of risks. For convenience, we distinguish between

different categories of risk: market risk, credit risk, liquidity risk, etc. Although such

categorization is convenient, it is only informal. Usage and definitions vary. Boundaries

between categories are blurred. A loss due to widening credit spreads may reasonably be

called a market loss or credit loss, so market risk and credit risk overlap. Liquidity risk

compounds other risks, such as market risk and credit risk. It cannot be divorced from the

risks it compounds.

An important but somewhat ambiguous distinguish is that between market risk and

business risk. Market risk is exposure to the uncertain market value of a portfolio. Business

risk is exposure to uncertainty in economic value that cannot be mark-to-market. The

distinction between market risk and business risk parallels the distinction between market-

value accounting and book-value accounting. The distinction between market risk and

business risk is ambiguous because there is a vast "gray zone" between the two. There are

many instruments for which markets exist, but the markets are illiquid. Mark-to-market

values are not usually available, but mark-to-model values provide a more-or-less accurate

reflection of fair value. Do these instruments pose business risk or market risk? The

decision is important because firms employ fundamentally different techniques for

managing the tworisks.

Business risk is managed with a long-term focus. Techniques include the careful

development of business plans and appropriate management oversight. Book-value

accounting is generally used, so the issue of day-to-day performance is not material. The

focus is on achieving a good return on investment over an extended horizon. Market risk is

managed with a short-term focus. Long-term losses are avoided by avoiding losses from

one day to the next. On a tactical level, traders and portfolio managers employ a variety of


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risk metrics duration and convexity, the Greeks, beta, etc.to assess their exposures.

These allow them to identify and reduce any exposures they might consider excessive. On

a more Strategic level, organizations manage market risk by applying risk limits to traders'

or portfolio managers' activities. Increasingly, value-at-risk is being used to define and

monitor these limits. Some organizations also apply stress testing to their portfolios.


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CHAPTER-4

RESEARCH METHODOLOGY

4.1 PROBLEM STATEMENT

In the recent years the financial system especially the banks have undergone

numerous changes in the form of reforms, regulations & norms. The attempt here is to see

how various ratios have been used and interpreted to reveal a banks performance and how

this particular model encompasses a wide range of parameters making it a widely used and

accepted model in todays scenario

4.2 NEED FOR THE STUDY

The ultimate need for the study is to find the performance level of two public sector

bank (Indian overseas bank and Indian bank) using CAMEL Framework as a Tool.

Through this project the Company is made aware of the areas in which they are

effective and the areas in which they need to lay more emphasis.

4.3 SCOPE OF THE STUDY

This study was done using CAMEL Framework to the study of banking performance of

public sector bank in India.

The study covers two public sector banks only (Indian overseas bank and Indian bank).

Financials and other data regarding the bank financials are based on the yearly annual

reports.

This study also suggests that the bank should try formulating their future course of

action.

4.4 OBJECTIVES OF THE STUDY

To understand the financial performance of the banks.

To describe the CAMELS model of ranking, banking institutions, so as to analyze

the comparative of IOB and INDIAN BANK

To analyze the banks performance through CAMEL model and give suggestion for

improvement if necessary.


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4.5 RESEARCH METHODOLOGY ADOPTED

We are under going to have analytical research i.e. analysis of banks financial

statements which will make us understand the position of one bank in comparison

of another and their financial position.

4.5.1 RESEARCH DESIGN

To achieve our objective we have done analytical research.

We have selected three banks for our study.

Public Sector BankIndian Overseas Bank

Public Sector BankIndian Bank

The period for evaluating performance through CAMELS in this study is three

years, (i.e.) from financial year 2009-10 to 2010-11 and 2011 to 2012.

4.5.2 DATA COLLECTION METHOD

The data is collected from various sources as follows.

a) Primary Data:

Primary data collected from the Banks Balance Sheets, Profit & Loss statements

and also by taking personal visit to the employees of the banks.

b) Secondary Data:

Secondary data for the ratio analysis & interpretation was collected from journals,

Banksprospectus, banks annual reports and internet.

4.5.3 FINANCE TECHNIQUES

It is also known as financial techniques. Various accounting techniques

such as Comparative Financial Analysis, Common-size Financial Analysis, Trend

Analysis, Fund Flow Analysis, Cash Flow Analysis, Ratio Analysis, etc. may be used for

the purpose of financial analysis. Some of the important techniques which are suitable for

the financial analysis of GSRTC are discussed hereunder:

a. Ratio Analysis

A ratio is a mathematical relationship between two items expressed in a

quantitative form. Ratio is defined as a relationship expressed in quantitative terms,


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between figures which have cause and effect relationship or which are connected with each

other in some manner or the other. The analysis also reveals whether the company's

financial position has been improving or deteriorating over time.

b. Comparative analysis:

This is yet another technique used in financial statement analysis. These

statements summaries and present related data for a number of years, incorporating therein

changes in individual items of financial statements. These statements normally comprise of

comparative balance sheet, profit and loss, comparative statements of changes in total

capital as well as in working capital. These statements highlight the trends in performance

efficiency and financial position.

c. Common-Size Financial Analysis:

Common size statements indicate the relationship of various items with

some common items, (expressed as percentage of the common item). In this income

statement the sales figure is taken as basis and all other figures are expressed as percentage

of sales. Similarly in the balance sheet the total assets and liabilities are taken as base and

all other figures are expressed as percentage of this total.

4.5.4 TOOLS USED

Common size statement.

Comparative statement.

Ratio analysis

4.6 LIMITATIONS OF STUDY

The study was limited to two banks only.

Time and resource constrains. The method discussed pertains only to banks though it can be used for performance

evaluation of other financial institutions.

The study was completely done on the basis of ratios calculated from the balance

sheets.


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DEBT-EQUITY RATIO

TABLE 5.1.2

DEBT-EQUITY RATIO

BANKS 2010 2011 2012

IOB 119.37 % 207.56 % 197.97 %

INDIAN BANK 11.57 % 22.06 % 45.11 %

CHART 5.1.2

INTERPRETATION:

The Debt to Equity Ratio measures how much money a bank should safely be able

to borrow over long periods of time. Generally, any bank that has a debt to equity ratio of

over 40% to 50% should be looked at more carefully to make sure there are no liquidity

problems.

In IOB bank, this ratio more than expected from 2010 to 2012. In 2010 IOB shows

low ratio as compare to 2011 because their profit has been increasing and they paid

liabilities. In 2012 IOB slightly changed.


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In Indian bank there is no liability problem because the ratios maintain 50%.there is

a continuous increment in reserves and surplus so that the ratio was continuously decrease

and in the year 2012 there is increment in borrowings so that the ratio was slightly

increased.

TOTAL ADVANCE TO TOTAL ASSET RATIO

TABLE 5.1.3

TOTAL ADVANCE TO TOTAL ASSET RATIO

BANKS 2010 2011 2012

IOB 60.26 % 62.55 % 64.06 %

INDIAN BANK 61.29% 61.82 % 63.86 %

CHART 5.1.3

INTERPRETATION:Total Advance to Total Asset Ratio shows that how much amount the bank holds

against its assets. Here in AXIS Bank, from 2010 to 2012 this ratio is continuously

increased because increase in advances is more than increase in total assets which shows

growth in investment. And that is good sign for the bank.


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This ratio of IOB has increased continuously. In the year 2012, the loans &

advances were increased so the ratio was increased to 64.06%. The same way because of

decreasing advances during the year 2010 the ratio was decreased.

Indian banks Total Advances to Total Asset Ratio is continuously increasing from

61.29% to 63.86%, which shows the sound condition of the bank. As the bank is growing

the advances and the assets are increased in same proportion. Because of that the ratio

keeps in same rate.

GOVERNMENT SECURITIES TO TOTAL INVESTMENTS

TABLE 5.1.4

GOVERNMENT SECURITIES TO TOTAL INVESTMENTS

BANKS 2010 2011 2012

IOB 85.13 % 78.33 % 89.91 %

INDIAN BANK 81.66 % 54.11 % 60.79 %

CHART 5.1.4


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INTERPRETATION:

Net NPAs reflects the performance of banks. A high level of NPAs suggests high

probability of a large number of credit defaults that affect the profitability and net-worth of

banks and also wear down the value of the asset. Loans and advances usually represent the

largest asset of most of the banks. It monitors the quality of the banks loan portfolio. The

higher the ratio, the higher the credits risk.

Above ratios show the fluctuation of NPA of IOB during the last 2 years. The bank

has lowest net NPA is 1.35% in 2012. Net NPA is continuously decreased from 2009 to

2011. So it is good for the bank to decrease in NPA. Because of decrease in NPA the risk

of bad loans are also decreased.

In Indian bank ratio shows NPA increasing 0.23% to 1.3% its bad for the bank.

MANAGEMENT QUALITY

TOTAL ADVANCE TO TOTAL DEPOSIT RATIO

TABLE 5.1.7

Total Advance to Total Deposit Ratio

BANKS 2010 2011 2012

IOB71.30 % 77.00 % 78.86 %

INDIAN BANK 70.43 % 71.12 % 74.76 %


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CHART 5.1.7

INTERPRETATION:

This ratio shows the investment of the bank through approving the loans against

accepting the loan.

In IOB Bank, the ratio is continuously increasing year by year from 71.30% to

78.86% in year 2010 to 2012. This shows good sign of the bank, if it will be increased

more, than it may be risky for the bank.

Same in Indian bank, this ratio is continuously increased from 74.43% to 74.76% in year

2010 to 2012.

66.00%

68.00%

70.00%

72.00%

74.00%

76.00%

78.00%

80.00%

2010 2011 2012

IOB

INDIAN BANK


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BUSINESS PER EMPLOYEE

TABLE 5.1.8

BUSINESS PER EMPLOYEE (Amt in Rs crore)

BANKS 2010 2011 2012

IOB 7.12 10.05 11.76

INDIAN BANK 5.93 4.81 3.87

CHART 5.1.8

INTERPRETATION:

Revenue per employee is a measure of how efficiently a particular bank is utilizing

its employees. Ideally, a bank wants the highest business per employee possible, as it

denotes higher productivity. In general, rising revenue per employee is a positive sign that

suggests the bank is finding ways to squeeze more sales/revenues out of each of itsemployee.

In IOB Bank, this ratio increases continuously year by year from 7.12crore in the

year 2010 to 10.05crore in year 2011 and 11.76crore in the year 2012.

In Indian bank, this ratio decreases continuously year by year from 5.93 to 3.87.

Because past two years less recruitments in the year 2010 to 2012.


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PROFIT PER EMPLOYEE

TABLE 5.1.9

(Amount in Rs. lac)

PROFIT PER EMPLOYEE

BANKS 2010 2011 2012

IOB 2.63 4.16 3.84

INDIAN BANK 7.92 8.88 9.30

CHART 5.1.9

INTERPRETATION:

Profit per employee is a measure of how efficiently a particular bank is utilizing its

employees. Ideally, a bank wants the highest profit per employee.

In IOB the ratio is increased a little from 2.63lakh in 2010 to 4.16lakh in 2009. Theratio was increased in the year 2009 because of increment in Net profit. This shows the

efficiency of work staff of IOB.

In INDIAN Bank, the profit per employee was 7.92lakhs in 2010 and it has

increased to near 10lakhs in 2012 which shows that profit per employee is increased from

2010 to 2012.


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EARNINGS QUALITY:

DIVIDEND PAYOUT RATIO

TABLE 5.1.10

BANKS 2010 2011 2012

IOB31.55 33.52 39.69

INDIAN BANK 21.34 22.67 22.32

CHART 5.1.10

INTERPRETATION:

Dividend payout ratio shows the percentage of profit shared with the shareholders.

The more the ratio will increase the goodwill of the bank in the share market.

In IOB bank, the average ratio during the 3 years is approx 40%. They have paid

highest dividend in the year 2012. Then, the average was maintained by approximately by

35%. and In INDIAN bank, the average ratio during 3 years maintained by approximately

by 21%.

0

5

10

15

20

25

30

35

40

45

2010 2011 2012

IOB

INDIAN BANK


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OPERATING PROFIT BY AVERAGE WORKING FUND

TABLE 5.1.12

BANKS 2010 2011 2012

IOB1.40 % 1.60 % 1.60 %

INDIAN BANK 2.70 % 2.70 % 2.44 %

CHART 5.1.12

INTERPRETATION:

Earning reflect the growth capacity and the financial health of the bank. High

earnings signify high growth prospects.

In IOB Bank, it has increased from 1.40% to 1.60% during the year 2010 to 2012

which is good for the bank. In Indian bank ratio shows maintained same percentage past

three years.

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

2010 2011 2012

IOB

INDIAN BANK


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INTEREST INCOME TO TOTAL INCOME

TABLE 5.1.14

INTEREST INCOME TO TOTAL INCOME

BANKS 2010 2011 2012

IOB89.54 % 90.44 % 91.25 %

INDIAN BANK 87.00 % 88.78 % 90.84 %

CHART 5.1.14

INTERPRETATION:

Interest income to total income ratio shows that how much interest income earn

from total income.

IOB and INDIAN bank both ratios increasing from 2009 to 2012.this shows good effect in

profit from interest in bank because interest income is regulator income from customer.

84.00%

85.00%

86.00%

87.00%

88.00%

89.00%

90.00%

91.00%

92.00%

2010 2011 2012

IOB

INDIAN BANK


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OTHER INCOME TO TOTAL INCOME

TABLE 5.1.15

CHART 5.1.15

INTERPRETATION:

Fee based income account for a major portion of the banks other income. The bank

generates higher fee income through innovative products and adapting the technology for

sustained service levels. The higher ratio indicates increasing proportion of fee-based

income. The ratio is also influenced by gains on government securities, which fluctuates

depending on interest rate movement in the economy. The ratios shows year by year

decreasing.IOB bank 10.45% to 8.74% decreasing. In INDIAN bank ratio also decreasing

2010 to 2012.

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

2010 2011 2012

IOB

INDIAN BANK

OTHER INCOME TO TOTAL INCOME

BANKS 2010 2011 2012

IOB 10.45 % 9.55 % 8.74 %

INDIAN BANK 12.99 % 11.12 % 9.15 %


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LIQUIDITY

LIQUIDITY ASSET TO TOTAL ASSET

TABLE 5.1.16

LIQUIDITY ASSET TO TOTAL ASSET

BANKS 2010 2011 2012

IOB 7.49 6.72 7.40

INDIAN BANK 8.00 7.03 6.23

CHART 5.1.16

INTERPRETATION:

Liquidity for a bank means the ability to meet its financial obligations as they come

due. Bank lending finances investments in relatively illiquid assets, but it fund its loans

with mostly short term liabilities. Thus one of the main challenges to a bank is ensuring its

own liquidity under all reasonable conditions.

In INDIAN Bank this ratio is continuously decreased from 2010 to 2013. In 2010

this ratio is 8.00 % and it has decreased to 6.23 %. The ratio was decreased in the year

2012 because of increment in total assets.

0

1

2

3

4

5

6

7

8

9

2010 2011 2012

IOB

INDIAN BANK


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In IOB Bank, the ratio is increase from in 2010 to 24.44% and it decreased to

21.29% in 2011. In the year 2010, the ratio was highest because the bank has increased

investment in only government securities but in the last year bank has increased the total

investment in govt. securities as well as debentures & bonds also.

In INDIAN bank, the ratio was fluctuating during the three to four years. At last in

the year 2009 the ratio was 21.00%. In the year 2009, the G-sec investment was decreased

and the total assets were increased. So, the ratio was decreased.

APPROVED SECURITIES TO TOTAL ASSET

TABLE 5.1.18

APPROVED SECURITIES TO TOTAL ASSET

BANKS 2010 2011 2012

IOB 8.06 4.56 2.99

INDIAN BANK 20.65 8.70 3.04

CHART 5.1.18


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INTERPRETATION:

Approved securities include securities other than government securities. This ratio

measures the Approved Securities as a proportion of Total Assets. Banks invest in

approved securities primarily after meeting their SLR requirements, which are around 25%

of net demand and time liabilities. This ratio measures the risk involved in the assets hand

by a bank.

In IOB and INDIAN the ratio was continuously decreased from 2009 to 2013.The

ratio is continuously decreased because of decrement in Approved securities. In the last

year 2012 the ratio was decreased because of decrement in approved securities.

LIQUIDITY ASSET TO DEMAND DEPOSIT

TABLE 5.1.19

BANKS 2010 2011 2012

IOB 102.21 101.80 132.34

INDIAN BANK 122.46 132.96 126.52

CHART 5.1.19

0

20

40

60

80

100

120

140

2010 2011 2012

IOB

INDIAN BANK


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INTERPRETATION:

The ratio shows the power of liquidity asset against total demand deposits. It means

what part of the demand deposits can be easily converted into monetary form in need.

In IOB the ratio was fluctuate because of the change in the cash balance during the

each year ending. In the year 2012 because of increment in cash balance and the liquidity

assets were increased and vice versa the ratio was also increased.

In INDIAN bank the ratio was 101.80% in 2010 and at last in 2012 it was 132.34

%. The ratio was increased in the last year because of increment in assets by 20%. There

was not any large difference in demand deposits than the previous year.

LIQUIDITY ASSET TO TOTAL DEPOSIT

TABLE 5.1.20

LIQUIDITY ASSET TO TOTAL DEPOSIT

BANKS 2010 2011 2012

IOB109.37 62.09 68.86

INDIAN BANK 847.45 407.65 180.86


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CHART 5.1.20

INTERPRETATION:

The ratio shows how much part of the deposits invested into the liquidity asset,

which can be easily convert in to monetary value in the time of need.

IOB bank show in 2009 to 2010 increment of 109.37 the ratio was decreased a little

because of 68.86 %.In Indian bank ratio continually decreased year by year.

0

100

200

300

400

500

600

700

800

900

2010 2011 2012

IOB

INDIAN BANK


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Management Out of 15 %

Total Advance to Total Deposits 5 %

Business per Employee 5%

Profit per Employee 5%

Earnings Out of 18 %

Dividend payout ratio 3 %

Return on asset 3 %

Operating profit to average working fund 3 %

Net profit to average asset 3 %

Interest income to total income 3 %

Other income to total income 3 %

Liquidity Out of 25 %

Liquid asset to total asset 5 %

Government security to total security 5 %

Approved security to total security 5 %

Liquidity asset to demand deposit 5 %

Liquidity asset to total deposit 5 %

Total 100%


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5.3 RANKING

After allocating classes for the each ratio and for the three years, now we will give marks to

each bank on the basis of average of their average of performance during the last three

years i.e. 2010 to 2012 to all the banks.

CAPITAL ADEQUACY:

The Table Given Below Shows The Marks Given To The Capital Adequacy Out Of 7

Marks.

TABLE 5.3.1

RatiosBanks

IOB INDIAN BANK

CRAR 2 2

Debt-Equity 7 1

Total Advance to Total Asset 7 7

G-sec to Total Investment 5 2

Total 21 12

ASSET QUALITY:

The Table Given Below Shows the Marks Given To the Asset Quality Out Of 7

Marks

TABLE 5.3.2

RatiosBanks

IOB INDIAN BANK

Gross NPA to Total Loan Ratio 5 7

Net NPA to Total Loan Ratio 5 7

Total 10 14


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MANAGEMENT QUALITY:

The Table Given Below Shows the Mars Given to the Management Quality out Of 5 Marks

TABLE 5.3.3

RatiosBanks

IOB INDIAN BANK

Total Advance to Total Deposit 5 5

Business per Employee 5 2

Profit per Employee 2 4

Total 12 11

EARNINGS QUALITY:

The Table Given Below Shows the Marks Given to the Earnings Quality out Of 3

Marks

TABLE 5.3.4

RatiosBanks

IOB INDIAN BANK

Dividend payout Ratio 2.5 1.5

Return on Asset 1.0 2.5

Operating Profit to Avg Working Fund 0.5 2.5

Net profit to Average asset 0.5 2.0

Interest Income to Total income 2.5 2.5

Other Income to Total Income 1.0 1.0

Total 8 11


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LIQUIDITY:

The Table Given Below Shows the Marks Given to the liquidity ratio out Of 5 Marks

TABLE 5.3.5

RatiosBanks

IOB INDIAN BANK

Liquidity Asset To Total Asset 2 2

G-Sec To Total Asset 1 1

Approved Securities To Total Asset 5 5

Liquid Asset To Demand Deposit 5 5

Liquid Asset To Total Deposit 4 5

Total 17 18

OVERALL RANKING TO THE BANKS

TABLE 5.3.6

ParametersBanks

IOB Indian Bank

Capital Adequacy 21 12

Asset Quality 10 14

Management Quality 12 11

Earnings Quality 8 11

Liquidity 17 18

Total 68 66

Rank 1 2

After going through the whole the process, we found INDIAN OVERSEAS BANK

scored the highest score so we gave 1st rank to them, and accordingly the 2nd rank was

given to INDIAN BANK and. We found that IOB Bank has performed better than INDIAN

BANK during the last three years.


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CHAPTER-6

CONCLUSION SUGGESTIONS AND RECOMMENDATION

6.1 CONCLUSION

The report makes an attempt to examine and compare the performance of the two

different public sector banks of India i.e. IOB Bank and INDIAN Bank. The analysis is

based on the CAMEL Model. The study has brought many interesting results, some of

which are mentioned as below:

The two banks have succeeded in maintaining CRAR at a higher level than the

prescribed level, 9%. But the IOB and Indian has maintained highest across the

duration of last three years. It is very good sign for the bank to survive and to

expand in future. Gross NPA ratio has registered declining trend for all the two banks during the last

three years. But IOB Bank has been successful during the last two years in

managing the level of NPA. Thus, it indicates for improvement in the asset quality

position of all the three banks.

In Management Q

camel framework

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