CAMELS Rating: CAMELS rating is the rating system wherein the bank regulators or examiners evaluate an overall performance of the banks and determine their strengths and weaknesses.
CAMELS rating is based
on the financial statements of the banks, Viz. Profit and loss account, balance
sheet, and on-site examination by the bank regulators. In this Rating system,
the officers rate the banks on a scale from 1 to 5, where 1 is the best and 5
is the worst. The parameters on the basis of which the ratings are done are
represented by an acronym "CAMELS".
Capital
Adequacy: The capital adequacy measures the bank's capacity
to handle the losses and meet all its obligations towards the customers without
ceasing its operations. This can be met only on the basis of an amount and the
quality of capital, a bank can access. A ratio of Capital to Risk-Weighted
Assets determines the bank's capital adequacy
Asset
Quality: An asset represents all the assets of the hank.
Viz. Current and fixed, loans, investments, real estate and all the off-balance
sheet transactions. Through this indicator, the performance of an asset can be
evaluated. The ratio of Gross Non-Performing Loans to Gross Advances is one of
the criteria to evaluate the effectiveness of credit decisions made by the
bankers
Management
Quality: The board of directors and top-level managers are
the key persons who are responsible for the successful functioning of the
banking operations. Through this parameter, the effectiveness of the management
is checked out such as, how well they respond to the changing market
conditions, how well the duties and responsibilities are delegated, how well
the compensation policies and job descriptions are designed, etc.
Earnings:
Income from all the operations, non-traditional, and extraordinary sources
constitute the earnings of a bank. Through this parameter, the bank's
efficiency is checked with respect to capital adequacy to cover all the
potential losses and the ability to pay off the dividends. Return on Assets
Ratio measures the earnings of the banks.
Liquidity. The bank's ability to convert assets into cash is called liquidity. The ratio of Cash maintained by Banks and Balance with the Central Bank to Total Assets determines the liquidity of the bank.
Sensitivity
to Market Risk: Through this parameter, the bank's sensitivity
towards the changing market conditions is checked, which is how adverse changes
in the interest rates, foreign exchange rates, commodity prices, and fixed assets
will affect the bank and its operations.
Thus, through CAMELS
rating, the overall financial position of the bank is evaluated and the
corrective actions, if any, are taken accordingly.