CAMELS Rating System
CAMELS Rating System
CAMELS Rating System
C - Capital adequacy
A - Asset quality
M - Management quality
E - Earnings
L - Liquidity
S - Sensitivity to Market Risk
Bank supervisory authorities assign each bank a score on a scale of one (best) to five (worst) for
each factor. If a bank has an average score less than two it is considered to be a high-quality
institution, while banks with scores greater than three are considered to be less-than-satisfactory
establishments. The system helps the supervisory authority identify banks that are in need of
attention
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CAMELS
In 1994, the RBI established the Board of Financial Supervision (BFS), which operates as a unit
of the RBI. The entire supervisory mechanism was realigned to suit the changing needs of a
strong and stable financial system. The supervisory jurisdiction of the BFS was slowly extended
to the entire financial system barring the capital market institutions and the insurance sector. Its
mandate is to strengthen supervision of the financial system by integrating oversight of the
activities of financial services firms. The BFS has also established a sub-committee to routinely
examine auditing practices, quality, and coverage.
In addition to the normal on-site inspections, Reserve Bank of India also conducts off-site
surveillance which particularly focuses on the risk profile of the supervised entity. The Off-site
Monitoring and Surveillance System (OSMOS) was introduced in 1995 as an additional tool for
supervision of commercial banks. It was introduced with the aim to supplement the on-site
inspections. Under off-site system, 12 returns (called DSB returns) are called from the financial
institutions, wich focus on supervisory concerns such as capital adequacy, asset quality, large
credits and concentrations, connected lending, earnings and risk exposures (viz. currency,
liquidity and interest rate risks).
In 1995, RBI had set up a working group under the chairmanship of Shri S. Padmanabhan to
review the banking supervision system. The Committee certain recommendations and based on
such suggetions a rating system for domestic and foreign banks based on the international
CAMELS model combining financial management and 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 (A to E) based on th elines of international CAMELS rating
model. CAMELS evaluates banks on the following six parameters :-
(a) Capital Adequacy :Capital adequacy is measured by the ratio of capital to risk-weighted
assets (CRAR). A sound capital base strengthens confidence of depositors
(b) Asset Quality : One of the indicators for asset quality is the ratio of non-performing loans to
total loans (GNPA). The gross non-performing loans to gross advances ratio is more indicative
of the quality of credit decisions made by bankers. Higher GNPA is indicative of poor credit
decision-making.
(c) Management : The ratio of non-interest expenditures to total assets (MGNT) can be one of
the measures to assess the working of the management. . This variable, which includes a variety
of expenses, such as payroll, workers compensation and training investment, reflects the
management policy stance.
Each of the above six parameters are weighted on a scale of 1 to 100 and contains number of
sub-parameters with individual weightages.
Rating
Rating symbol indicates
Symbol
A Bank is sound in every respect
B Bank is fundamentally sound but with moderate weaknesses
financial, operational or compliance weaknesses that give cause for
C
supervisory concern.
serious or immoderate finance, operational and managerial weaknesses that
D
could impair future viability
critical financial weaknesses and there is high possibililty of failure in the near
E
future.
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