A CAMELS ANALYSIS OF THE INDIAN BANKING INDUSTRY

MIHIR DASH1
ANNYESHA DAS

INTRODUCTION
The banking sector occupies a very important place in the countrys economy, acting
as an intermediary to all industries, ranging from agriculture, construction, textile,
manufacturing, and so on. The banking sector thus contributes directly to national
income and its overall growth. As the banking sector has a major impact on the
economy as a whole, evaluation, analysis, and monitoring of its performance is very
important.
Many methods are employed to analyse banking performance. One of the popular
methods is the CAMELS framework, developed in the early 1970s by federal
regulators in the USA. The CAMELS rating system is based upon an evaluation of six
critical elements of a financial institutions operations: Capital adequacy, Asset
quality, Management soundness, Earnings and profitability, Liquidity, and Sensitivity
to market risk. Under this bank is required to enhance capital adequacy, strengthen
asset quality, improve management, increase earnings, maintain liquidity, and reduce
sensitivity to various financial risks.

LITERATURE REVIEW
The analysis of banking performance has received a great deal of attention in the
banking literature. A popular framework used by regulators is the CAMELS
framework, which uses some financial ratios to help evaluate a banks performance
(Yue, 1992). Several studies involve the use of ratios for banks performance
appraisal, including Beaver (1966), Altman (1968), Maishanu (2004), and Mous
(2005).
Beaver (1966) initiated the use of financial ratios for predicting bankruptcy,
considering only one ratio at a time. Altman (1968) went further, using a multiple
discriminant analysis (MDA) for the same purpose, combining several financial ratios
in a single prediction model called the Altmans z-score model. However, Altmans
model ignored the industry-specificity of healthy indications by the financial ratios.
Maishanu (2004) studied financial health of banks, and suggested eight financial
ratios to diagnose the financial state of a bank.
Mous (2005) studied bankruptcy prediction models of banks using financial ratios of
profitability, liquidity, leverage, turnover and total assets in decision tree models and
multiple discriminant models, and found that the decision tree approach performed
better.
The CAMEL framework was originally intended to determine when to schedule onsite examination of a bank (Thomson, 1991; Whalen and Thomson, 1988). The five
CAMEL factors, viz. Capital adequacy, Asset quality, Management soundness,
Earnings and profitability, and Liquidity, indicate the increased likelihood of bank

The first author is a senior faculty at Alliance Business School, No. 2 & 3, 2nd Cross, 36th Main, BTM Layout, I Stage,
Bangalore-560068, and can be contacted by phone on +91-9945182465, or by email at mihirda@rediffmail.com. The other
author is a research scholar at the same institution.

Electronic copy available at: http://ssrn.com/abstract=1666900

failure when any of these five factors prove inadequate. The choice of the five
CAMEL factors is based on the idea that each represents a major element in a banks
financial statements. Several studies provide explanations for choice of CAMEL
measures: Lane et al. (1986), Looney et al. (1989), Elliott et al (1991), Eccher et al.
(1996), and Thomson (1991). For example, Waldron et al (2006) suggested that one
of these threats represented in CAMEL exists in the loss of assets (A); similarly,
short-term liquid assets (L) aid in covering loan payment defaults and offset the threat
of losses or large withdrawals that might occur. The CAMELS framework extends the
CAMEL framework, considering six major aspects of banking: Capital adequacy,
Asset quality, Management soundness, Earnings and profitability, Liquidity, and
Sensitivity to market risk.
The usage of the CAMEL(S) framework in banking studies in emerging economies is
limited. Wirnkar and Tanko (2008) studied banking performance of major Nigerian
banks using the CAMEL framework. Very recently, Sangmi and Nazir (2010) have
studied banking performance of two Indian banks using the CAMEL framework.
Also, Agarwal and Sinha (2010) have studied the performance of microfinance
institutions in India using the CAMEL framework.
The present study analyses and compares the performance of public and
private/foreign banks in India using the CAMELS framework.

DATA AND METHODOLOGY

The analysis was performed for a sample of fifty-eight banks operating in India, of
which twenty-nine were public sector banks, and twenty-nine were private
sector/foreign banks. The study covered the financial years 2003-04, 2004-05, 200506, 2006-07, and 2007-08 (i.e. prior to the global financial crisis). The data for the
study consisted of financial variables and financial ratios based on the CAMELS
framework, obtained from the Capitaline database. The variables used in the analysis
were: Tier-I Capital, Tier-II Capital, and Capital Adequacy Ratio (for Capital
Adequacy); Gross Non-performing Assets, Net Non-performing Assets, and Net Nonperforming Assets to Total Advances Ratio (for Asset Quality); Total Investments to
Total Assets Ratio, Total Advances to Total Deposits Ratio, Sales per Employee, and
Profit After Tax per Employee (for Management Soundness); Return on Net Worth,
Operating Profit to Average Working Fund Ratio, Profit After Tax to Total Assets
Ratio (for Earnings and profitability); Government Securities to Total Investments
Ratio and Government Securities to Total Assets Ratio (for Liquidity); and Beta (for
Sensitivity to Market Risk).
In order to calculate the CAMELS ratings for the banks, the ratios corresponding to
each CAMELS factor were considered: viz. Capital Adequacy Ratio, Net Nonperforming Assets to Total Advances Ratio, Total Investments to Total Assets Ratio,
Total Advances to Total Deposits Ratio, Sales per Employee, Profit After Tax per
Employee, Return on Net Worth, Operating Profit to Average Working Fund Ratio,
Government Securities to Total Investments Ratio, and Beta (two ratios, viz. Profit
After Tax to Total Assets Ratio and Government Securities to Total Investments Ratio
were removed). The variables were normalized using the formula:
, where u
represents the upper bound, and l the lower bound; the ratings were assigned as
follows: 1 = 0.0 - 0.2, 2 = 0.2 - 0.4, 3 = 0.4 - 0.6, 4 = 0.6 - 0.8, and 5 = 0.8 - 1.0
(except for non-performing assets and beta, for which the ratings were reversed). The
CAMELS rating was obtained as the total of the individual variable ratings.
2

Electronic copy available at: http://ssrn.com/abstract=1666900

ANALYSIS AND INTERPRETATION

CAPITAL ADEQUACY: Table 1 shows the Tier-I Capital, Tier-II Capital, and
Capital Adequacy Ratio of public and private/foreign banks. It was found that
private/foreign banks had higher Tier-I Capital than public sector banks, while public
sector banks had higher Tier-II Capital than private/foreign banks. It was also found
that private/foreign banks had higher Capital Adequacy Ratio than public sector
banks. In particular, these differences were statistically significant in 2008.
ASSET QUALITY: Table 2 shows the Gross Non-performing Assets, Net Nonperforming Assets, and Net Non-performing Assets to Total Advances Ratio of public
and private/foreign banks. It was found that public sector banks had higher Gross
Non-performing Assets and Net Non-performing Assets than private/foreign banks,
and that these differences were statistically significant. On the other hand, there was
no significant difference in the Net Non-performing Assets to Total Advances Ratio
of public and private/foreign banks.
MANAGEMENT SOUNDNESS: Table 3 shows the Total Investments to Total
Assets Ratio, Total Advances to Total Deposits Ratio, Sales per Employee, and Profit
After Tax per Employee of public and private/foreign banks. It was found that
private/foreign banks had higher Total Investments to Total Assets Ratio than public
sector banks, while public sector banks had higher Total Advances to Total Deposits
Ratio than private/foreign banks; however, these differences were not statistically
significant. It was found that private/foreign banks had higher Sales per Employee
than public sector banks, and that these differences were statistically significant. It
was also found that private/foreign banks had higher Profit After Tax per Employee
than public sector banks, but that these differences were not statistically significant.
EARNINGS AND PROFITABILITY: Table 4 shows the Return on Net Worth,
Operating Profit to Average Working Fund Ratio, Profit After Tax to Total Assets
Ratio of public and private/foreign banks. It was found that public sector banks had
higher Return on Net Worth than private/foreign banks, and that these differences
were statistically significant. On the other hand, it was found that private/foreign
banks had higher Operating Profit to Average Working Fund Ratio and Profit After
Tax to Total Assets Ratio than public sector banks, though the differences were not
statistically significant.
LIQUIDITY: Table 5 shows the Government Securities to Total Investments Ratio
and Government Securities to Total Assets Ratio of public and private/foreign banks.
It was found that public sector banks had higher Government Securities to Total
Investments Ratio and Government Securities to Total Assets Ratio than
private/foreign banks (except in 2008), but the differences were not statistically
significant.
SENSITIVITY TO MARKET RISK: Table 6 shows the Beta of public and
private/foreign banks. It was found that public sector banks had higher Beta than
private/foreign banks, and the difference was statistically significant.
OVERALL CAMELS RATINGS: Table 7 shows the overall CAMELS ratings for all
the sample banks in the study period. It was found that Barclays Bank was the best
performing bank in the years 2003-04, 2004-05, and 2005-06, while Bank of America
was the best performing bank in the years 2006-07 and 2007-08.
Table 8 shows the overall CAMELS ratings of public and private/foreign banks.
There was found to be no significant difference in the overall CAMELS ratings of
3

public and private/foreign banks. Moreover, there was a trend improvement in the
overall CAMELS ratings of private/foreign banks over that of public sector banks.

DISCUSSION
The results of the study show that private/foreign banks fared better than public sector
banks on most of the CAMELS factors in the study period. The two contributing
factors for the better performance of private/foreign banks were Management
Soundness and Earnings and Profitability.
The results of the study suggest that public sector banks have to adapt quickly to
changing market conditions, in order to compete with private/foreign banks. This is
particularly due to the wide difference in their credit policy, customer service, ease of
access and adoption of IT services in their banking system. Public sector banks must
improve their credit lending policies so as to improve asset quality and profitability.
They need to continuously monitor the health and profitability of bank borrowers, so
that the risk of non-performing assets decreases. They also must improve their
marketing and distribution strategies in order to attract customers and provide better
customer service. They also must take steps to improve employee motivation and
productivity.
There are some limitations inherent in the present study. The sample size used for the
study is limited. Further, the study period was limited due to the limited availability of
data. Another limitation was in the nature of the overall CAMELS rating used: the
rating gives undue importance to the factors of management soundness and earnings.
Further, the CAMELS framework is not a comprehensive framework; for example, it
does not take into consideration other forms of risk (such as credit risk). Further
studies can incorporate other risk factors into the framework to provide a more
comprehensive measure of banking performance.

BIBLIOGRAPHY
Agarwal, P.K. and Sinha, S.K. (2010), Financial Performance of Microfinance
Institutions of India, Delhi Business Review, 11(2).
Altman, I.E. (1968), Financial Ratios, Discriminant Analysis and Prediction of
Corporate Bankruptcy, Journal of Finance, September 1968, New York
University.
Eccher, E. A., Ramesh K., and Thiagarajan S. R. (1996), Fair value disclosures
by bank holding companies, Journal of Accounting and Economics, 22(1).
Elliott, J. A., Douglas, H. L. J., and Shaw, W. H. (1991), The Evaluation by the
Financial Markets of Changes in Bank Loan Loss Reserve Levels, The
Accounting Review, 66(4).
Lane, W. R., Looney, S. W., and Wansley J. W. (1986), An Application of the
Cox Proportional Hazards Model to Bank Failure, Journal of Banking and
Finance, 10(4).
Looney, S. W., Wansley, J. W., and Lane, W. R. (1989), An Examination of
Misclassifications with Bank Failure Prediction Models, Journal of Economics
and Business, 41(4).
Maishanu, M.M. (2004), A Univariate Approach to Predicting failure in the
Commercial Banking Sub-Sector, Nigerian Journal of Accounting Research,
Vol. 1, No. 1.

Mous, L. (2005), Predicting bankruptcy with discriminant analysis and decision

tree using financial ratios, Working Paper Series, University of Rotterdam.
Sangmi, M. and Nazir, T. (2010), Analyzing Financial Performance of
Commercial Banks in India: Application of CAMEL Model, Pak. J. Commer.
Soc. Sci., 4(1)
Thomson, J. B. (1991), Predicting Bank Failures in the 1980s, Federal Reserve
Bank of Cleveland Economic Review, 27.
Waldron, M., Jordan, C., and MacGregor, A. (2006), the Information Content of
Loan Default Disclosure in the Prediction of Bank Failure, Journal of Business &
Economic Research, 4(9).
Whalen, G. and Thomson, J. B. (1988), Using Financial Data to Identify Changes
in Bank Conditioning. Federal Reserve Bank of Cleveland, Economic Review,
24(1), 17-26.
Wirnkar, A.D. and Tanko, M. (2008), CAMELS and Banks Performance
Evaluation: The Way Forward, Working Paper Series, SSRN:
http://ssrn.com/abstract=1150968
Yue, P. (1992), Data Envelopment Analysis and Commercial Bank Performance:
A Primer with Applications to Missouri Banks, Working Papers, IC2 Institute,
University of Texas at Austin.

Table 1: Capital Adequacy

Tier I
Capital

Tier II
Capital

Capital
Adequacy
Ratio

mean
std. dev.
F-statistic
p-value
mean
std. dev.
F-statistic
p-value
mean
std. dev.
F-statistic
p-value

2004
private/foreign
13.5043
8.1287
3.4700
0.0678
3.9157
2.3999
2.1903
0.1446
16.4231
8.0232
1.0960
0.3000

public
9.8710
6.5372

4.6717
1.3222

14.5241
5.5702

2005
private/foreign
12.9090
10.8474
2.7100
0.1050
3.1341
1.4922
11.6720
0.0010
16.0431
10.7070
1.1810
0.2820

2006
private/foreign
13.2128
11.8815
1.7730
0.1880
2.7790
1.9754
0.8400
0.3630
15.7955
11.2442
1.3520
0.2500

public
9.0603
6.3911

4.5121
1.5782

13.5724
5.9343

public
10.0245
5.0085

3.1648
1.1115

13.1893
4.3927

2007
private/foreign
11.9670
7.6960
3.7490
0.0580
2.4824
1.8280
12.4560
0.0010
14.4490
6.7998
1.2650
0.2650

public
8.8720
3.8540

4.0307
1.4965

12.9028
2.9257

2008
private/foreign
12.9999
8.6535
11.3160
0.0010
2.2703
1.7239
23.7420
0.0000
15.2693
7.9247
5.2690
0.0250

public
7.4134
2.2510

4.3148
1.4608

11.7283
2.4937

Table 2: Asset Quality

Gross Nonperforming
Assets
Net Nonperforming
Assets
Net Nonperforming
Assets: Total
Advances

mean
std. dev.
F-statistic
p-value
mean
std. dev.
F-statistic
p-value
mean
std. dev.
F-statistic
p-value

2004
private/foreign
287.3079
553.9922
10.2250
0.0020
69.4252
70.3939
8.5950
0.0050
2.3745
2.3914
0.1650
0.6860

public
1770.2390
2435.2389

642.1021
1049.5997

2.6279
2.3650

2005
private/foreign
281.9297
507.3847
9.9130
0.0030
129.7760
276.3352
5.6950
0.0200
2.4066
4.4495
0.3850
0.5380

2006
private/foreign
243.1379
421.4886
11.9840
0.0010
104.1886
202.7454
5.4730
0.0230
1.0200
1.0940
0.5440
0.4640

public
1663.5238
2307.9851

585.7270
991.0549

1.8617
1.6081

public
1420.7266
1782.7094

502.4679
894.0809

1.2028
0.7646

2007
private/foreign
326.7738
760.6410
7.7810
0.0070
145.8483
371.3168
4.0910
0.0480
0.7521
0.7459
0.6450
0.4250

public
1356.8621
1837.4099

530.5334
954.5044

0.8879
0.5230

2008
private/foreign
470.4955
1389.6714
3.4770
0.0670
206.8386
641.0819
2.1510
0.1480
0.6414
0.5918
0.3570
0.5520

public
1409.5845
2328.8894

614.0869
1350.9161

0.7259
0.4786

Table 3: Management Soundness

Total
Investments:
Total Assets
Total
Advances:
Total
Deposits
Sales per
Employee

Profit After
Tax per
Employee

mean
std. dev.
F-statistic
p-value
mean
std. dev.
F-statistic
p-value
mean
std. dev.
F-statistic
p-value
mean
std. dev.
F-statistic
p-value

2004
private/foreign
33.9520
13.8621
3.5430
0.0650
63.2424
42.5020
1.4080
0.2400
5.7541
4.0709
20.5840
0.0000
0.1752
0.3995
1.2520
0.2680

public
39.9900
10.3075

105.0652
185.0132

2.2328
0.9473

0.0800
0.2241

2005
private/foreign
34.0070
8.9716
0.7490
0.3910
73.2493
49.6188
1.1410
0.2900
6.2979
4.1143
13.3210
0.0010
0.1466
0.3342
0.8500
0.3600

public
36.0970
9.4176

117.5234
217.6143

3.1010
2.3069

0.0755
0.2459

2006
private/foreign
30.0930
8.0381
0.0140
0.9070
77.0934
43.2790
1.0040
0.3210
6.8490
4.3031
9.5630
0.0030
0.1862
0.5104
1.0910
0.3010

public
29.8450
8.1042

2040.2352
10549.0729

3.8903
2.8337

0.0762
0.2474

2007
private/foreign
29.7030
7.7604
2.9240
0.0930
84.7807
63.4981
0.9940
0.3230
7.3938
4.4179
8.5470
0.0050
0.1286
0.1929
0.5480
0.4620

public
26.3860
6.9939

1285.3172
6484.2471

4.6790
2.3429

0.0845
0.2566

2008
private/foreign
28.4069
13.3129
2.3100
0.1340
77.8710
46.3586
1.0080
0.3200
8.9931
5.9585
6.1570
0.0160
0.1548
0.2529
0.8940
0.3490

public
24.0517
7.8020

580.3107
2694.3073

5.9145
3.0223

0.0897
0.2718

Table 4: Earnings and Profitability

Return on Net
Worth

Operating
Profit: Average
Working Fund
Profit After
Tax: Total
Assets

mean
std. dev.
F-statistic
p-value
mean
std. dev.
F-statistic
p-value
mean
std. dev.
F-statistic
p-value

2004
private/foreign
15.8445
11.1593
11.1680
0.0010
3.2338
2.9614
0.0760
0.7830
1.3676
1.1553
0.0200
0.8880

public
25.3186
10.4188

3.0772
0.7279

1.3348
0.4765

2005
private/foreign
9.6024
7.8660
14.7310
0.0000
2.0593
1.4878
1.1750
0.2830
0.6969
1.2869
1.3140
0.2570

public
18.2507
9.2394

2.3969
0.7739

0.9907
0.4988

2006
private/foreign
11.0345
6.4684
5.5830
0.0220
2.8607
3.0354
2.1950
0.1440
1.3597
1.9140
1.5230
0.2220

public
15.2852
7.2117

2.0186
0.3934

0.9110
0.4114

2007
private/foreign
12.7783
7.3289
8.0940
0.0060
2.9145
1.7458
8.1210
0.0060
1.4172
1.0914
4.2360
0.0440

public
17.6931
5.7299

1.9734
0.3383

0.9879
0.2657

2008
private/foreign
12.8828
6.9565
13.8410
0.0000
3.0662
1.8654
12.6360
0.0010
1.4214
0.9207
6.1050
0.0170

public
19.2259
5.9922

1.7824
0.5503

0.9731
0.3269

Table 5: Liquidity

Government
Securities:
Total
Investments
Government
Securities:
Total Assets

mean
std. dev.
F-statistic
p-value
mean
std. dev.
F-statistic
p-value

2004
private/foreign
72.2450
23.0563
1.5740
0.2150
26.0970
11.6054
4.3020
0.0430

2005
private/foreign
74.4170
13.4782
11.6720
0.0010
25.4720
9.2848
1.7000
0.1980

public
78.7110
15.4482

32.0450
10.1892

public
79.3930
20.0318

28.8790
10.5742

2006
private/foreign
75.8070
10.3587
4.3570
0.0410
22.4520
4.1967
2.2780
0.1370

public
81.6790
11.0560

24.8280
7.3647

2007
private/foreign
71.9720
17.9599
5.7340
0.0200
21.0030
3.3962
0.4000
0.5300

public
81.2340
10.5502

21.8340
6.2052

2008
private/foreign
72.4690
22.8196
1.3000
0.2590
22.0862
9.2968
0.7750
0.3830

public
78.7034
18.6039

20.2034
6.8011

Table 6: Sensitivity to Market Risk

Beta

mean
std. dev.
F-statistic
p-value

2004
private/foreign
0.4148
0.5262
7.8430
0.0070

public
0.8921
0.7518

2005
private/foreign
0.4207
0.5107
7.1660
0.0100

public
0.8645
0.7322

2006
private/foreign
0.4490
0.5807
2.7530
0.1030

public
0.6862
0.5056

2007
private/foreign
0.4331
0.4751
4.7310
0.0340

public
0.7224
0.5360

2008
private/foreign
0.4897
0.5338
1.357
0.249

public
0.6397
0.4428

Table7: Overall CAMELS Ratings

Bank
Allahabad Bank
Andhra Bank
Bank of Baroda
Bank of India
Bank of Maharastra
Canara Bank
Central Bank
Corporation Bank
Dena Bank
EXIM Bank
IDBI Bank
Indian Bank
Indian Overseas Bank
NABARD
Oriental Bank
Punjab National Bank
Punjad Sind Bank
State Bank of Indore
State Bank of Mysore
State Bank of Patiala
State Bank of Bikaner and Jaipur
State Bank of Hyderabad
State Bank of Travancore
State Bank of India
Syndicate Bank
United Bank of India
UCO Bank
Union Bank
Vijaya Bank
ABN Amro Bank
American Express Bank
AXIS Bank
Bank of America
Bank of Rajasthan
Barclays Bank
BNP Paribas
Celyon Bank
Development Credit Bank
Deutshe Bank
Dhanalakshmi Bank
HDFC Bank

CAMELS
2008
29
32
29
33
29
30
25
32
30
34
27
34
32
21
28
31
33
29
33
30
30
31
23
25
30
26
24
34
27
34
20
31
46
29
32
39
44
28
39
28
34

CAMELS
2007
30
31
27
27
27
29
26
29
25
31
26
34
34
23
29
27
31
28
31
29
30
32
32
26
31
29
25
29
30
36
30
30
39
29
36
35
38
27
31
25
32

CAMELS
2006
32
29
25
25
27
29
26
29
26
27
27
31
33
22
29
27
27
27
32
30
28
33
29
29
32
29
26
25
28
31
30
29
31
22
40
28
35
22
27
24
30

CAMELS
2005
36
34
32
26
32
33
32
33
30
34
31
33
35
31
36
30
26
33
38
34
36
34
36
35
35
36
32
33
36
35
32
32
35
29
42
30
33
25
32
27
33

CAMELS
2004
34
34
31
29
33
31
30
33
29
26
31
31
32
32
34
32
25
36
34
36
34
35
35
32
33
33
32
31
36
32
25
32
33
32
45
30
31
28
39
29
31

HSBC Bank
ICICI Bank
IndusInd Bank
ING Vysya Bank
Jammu & Kashmir Bank
Karnataka Bank
Karur Vysya Bank
Kotak Mahindra Bank
Lakshmi Vilas Bank
Mizuho Corporate Bank
Nainital Bank
Ratanakar Bank
Standard Chartered Bank
Societe Generale Bank
South Indian Bank
TamilNad Merchantile Bank
Yes Bank

32
29
23
27
28
30
33
30
25
35
20
31
36
38
28
32
34

33
28
26
27
26
25
33
28
25
31
27
25
36
33
29
32
29

29
29
27
24
26
28
28
29
26
25
27
22
31
34
26
27
27

33
32
35
27
28
33
31
30
29
38
30
23
34
41
30
33
26

34
32
34
28
31
30
33
33
28
31
18
28
34
35
33
30
17

Table 8: Overall CAMELS ratings

CAMELS

mean
std. dev.
F-statistic
p-value

2004
private/foreign
30.8966
5.2328
1.4411
0.2350

public
32.2069
2.6777

2005
private/foreign
31.6552
4.2951
2.5305
0.1173

public
33.17241
2.8166

2006
private/foreign
28.0690
3.9364
0.0382
0.8457

10

public
28.2414
2.6546

2007
private/foreign
30.3793
4.1440
2.6118
0.1117

public
28.8966
2.6905

2008
private/foreign
31.5517
6.0979
2.8747
0.0955

public
29.3448
3.4566