-Prof.Suyash Bhatt

CAMELS Approach for Investments

CAMELS assessment C – Capital adequacyA – Asset qualityM – Management qualityE – EarningsL – LiquidityS – Sensitivity to Market Risk

Capital AdequacyCapital adequacy is measured by the ratio

of capital to risk-weighted assets (CRAR). A sound capital base strengthens confidence of depositors.Purpose of capitalFactors for evaluating capital adequacyMeasurement of capitalPrompt Corrective Action

Asset QualityOne 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.

Asset Quality[contd]Concept of asset qualityImpact of asset quality on bank’s financial

statementsConcepts of past-due and non-accrual loansAnalyzing asset quality ratiosAsset classification and types of asset

classificationRating of asset qualityAdequacy of allowance for loans and leases

losses (ALL)

Management CompetenceThe 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.

Management Competence[contd]Management organization and functionAssessment of managementEvaluation factors and ratings

Earnings AbilityIt can be measured as the the return on

asset ratio. Different components of earningsImportance of earnings to a bank’s financial

condition

Liquidity RiskCash maintained by the banks and

balances with central bank, to total asset ratio (LQD) is an indicator of bank's liquidity. In general, banks with a larger volume of liquid assets are perceived safe, since these assets would allow banks to meet unexpected withdrawals.

Liquidity Risk[contd]Liquidity riskLiquidity managementLiquidity managementRatings

Sensitivity to Market RiskComponents of market riskIdentifying areas sensitive to market riskMeasuring Interest rate Risk

Rating Symbol

Rating symbol indicates

A Bank is sound in every respect

BBank is fundamentally sound but with moderate weaknesses

Cfinancial, operational or compliance weaknesses that give cause for supervisory concern.

Dserious or immoderate finance, operational and managerial weaknesses that could impair future viability

Ecritical financial weaknesses and there is high possibililty of failure in the near future.

Thank You…