Document3

….. Performance Measurement System in Indian Banking Sector in Camel Framework

CHAPTER SIX

PERFORMANCE MEASUREMENT SYSTEM IN INDIAN BANKING SECTOR IN CAMEL FRAMEWORK

A sound financial system is indispensable for a healthy and vibrant economy.

The banking sector constitutes a predominant component of the financial services

industry. The performance of any economy to a large extent is dependent on the

performance of the banking sector. The banking sector’s performance is seen as the

replica of economic activities of the nation as a healthy banking system acts as the

bedrock of social, economic and industrial growth of a nation. Banking institutions in

our country have been assigned a significant role in financing the process of planned

economic growth.

During the past six decades since independence, the banking sector has

witnessed significant changes and has surely come a long way from the days of

nationalisation during early 1970s to the advent of liberalization, privatization and

globalization, in the post-991 era. The flurry of reforms witnessed over the last one and

half decade has brought about significant changes in the banking arena in the country.

Leveraging on their new found tech-savvy and increased thrust on product/service

innovation, the banks in the country witnessed a phenomenal growth in the last few

years as the economic growth moved up into top gear to be amongst top in the world.

The Asian crisis of 1997 and the recent events like the US sub prime crisis

have once again underlined the significance of a strong and robust financial sector for

smooth and efficient allocation of resources. Indian banks, which initially were in a

denial mode about the impact of crisis (on them), but soon admitted to vulnerability to

global shocks, have shown remarkable resilience, thanks to the Reserve Bank of India’s

timely and prudent measures which saved the domestic banks from the blushes of the

worst financial crisis. Life seems to be returning to normal in the global banking sector

after it was hard hit by the financial catastrophe, which unravelled in September, 2008,

as better than expected results from banks across the globe lend credence to the claims

that stimulus efforts are finally yielding results. Against this background, it is important

to measure the performance of the banking sector through a performance measurement

system that provides an opportunity to assess the performance of Indian banks

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The present supervisory system in banking sector is a substantial

improvement over the earlier system in terms of frequency, coverage and focus as also

the tool employed. Majority of the Basel Core Principles for effective banking

supervision have already been adhered to and rest is at the stage of implementation.

Two supervisory rating models based on CAMELS (Capital Adequacy, Assets Quality,

Management, Earning, Liquidity, Systems and Controls) and CACS (Capital

Adequacy, Assets Quality, Compliance, Systems and Controls) factors for rating of

Indian commercial Banks and Foreign Banks operating in India respectively, have been

worked out on the lines recommended by Padmanabhan Working Group (1995). These

ratings would enable the RBI to identify the banks whose condition warrants special

supervisory attention (Bodla and Verma, 2006).

Two decades have elapsed since the initiation of banking sector reforms in

India. Over this period, the banking sector has experienced a paradigm shift. Hence, it

is high time to make performance appraisal of this sector. Accordingly, a framework

for the evaluation of the current strength of the system, and of operations and the

performance of the banks has been provided by Reserve Bank’s measuring rod of

‘CAMELS’ which stands for capital adequacy, assets quality, management efficiency,

earning quality, liquidity and internal control systems.

The main endeavour of CAMEL system is to detect problems before they

manifest themselves. The RBI has instituted this mechanism for critical analysis of the

balance-sheet of banks by themselves and presentation of such analysis to provide for

internal assessment of the health of banks. The analysis, which is made available to the

RBI, forms a supplement to the system of off-site monitoring of banks. The prime

objective of the CAMEL model of rating banking institutions is to catch up the

comparative performance of various banks (Bodla and Verma, 2006).

CAMEL is, basically, a ratio-based model for evaluating the performance of

banks. It is a model for ranking/rating of the banks. The prime objective of this chapter

is to measure the performance of banking sector by dividing banks into public and

private sectors as explained earlier. Various ratios forming the model are explained as

follows (Joshi and Joshi, 2002):

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Capital Adequacy

Capital adequacy has emerged as one of the major indicators of the financial

health of a banking entity. It is important for a bank to maintain depositors’ confidence

and preventing the bank from going bankrupt. Capital is seen as a cushion to protect

depositors and promote the stability and efficiency of financial system around the

world. Capital Adequacy reflects the overall financial condition of the banks and also

the ability of management to meet the need for additional capital. It also indicates

whether the bank has enough capital to absorb unexpected losses. Capital Adequacy

Ratio acts as an indicator of bank leverage. The following ratios measure Capital

Adequacy:

1. Capital adequacy ratio (CAR)

The banks are required to maintain the capital adequacy ratio (CAR) as

specified by RBI from time to time. As per the latest RBI norms, the banks in India

should have a CAR of 12%. It is arrived at by dividing the sum of Tier-I, Tier-II and

Tier-III capital by aggregate of risk weighted assets (RWA). Symbolically,

CAR= (Tier-I + Tier-II + Tier-III)/RWA

Tier-I capital includes equity capital and free reserves.

Tier-II capital comprises of subordinate debt of 5-7 years tenure, revaluation

reserves, hybrid debt capital instruments and undisclosed reserves and cumulative

perpetual preference shares.

Tier-III capital comprises of short-term subordinate debt. The higher the CAR,

the stronger the bank.

2. 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. Debt-Equity

ratio is arrived at by dividing total borrowings and deposits by shareholders’ net worth,

which includes equity capital, and reserves and surpluses. Higher ratio indicates less

protection for the creditors and depositors in the banking system.

3. Advances to Assets

This is a ratio of the Total Advances to Total Assets. This ratio indicates a

bank’s aggressiveness in lending which ultimately results in better profitability. Total

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advances also include receivables. The value of Total Assets excludes the revaluation

of all the assets.

4. Government Securities to Total Investments

This ratio shows the risk involved in a bank’s investment. 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 Securities to investment ratio, the lower the risk involved in a bank’s

investment. It is arrived at by dividing the amount invested in government securities by

total investment.

Assets Quality

The quality of assets is an important parameter to gauge the degree of financial

strength. The prime motto behind measuring the assets quality is to ascertain the

component of Non-Performing Assets (NPAs) as a percentage of the total assets. This

indicates what types of advances the bank has made to generate interest income. Thus,

assets quality indicates the type of the debtors the bank is having. The following ratios

are necessary to assess assets quality:

1. Gross NPAs to Net Advance

It is a measure of the quality of assets in a situation, where the management

has not provided for loss on NPAs. The Gross NPAs are measured as a percentage of

Net Advances. The lower the ratio, the better is the quality of advances.

2. Net NPAs to Net Advances

It is a measure of the quality of assets in a situation where the management has

not provided for loss on NPAs. Net NPAs are Gross NPAs net of provisions on NPAs

and interest in suspense account. In this ratio, Net NPAs are measured as a percentage

of net advances.

3. Total Investments to Total Assets Ratio

Total investments to total assets indicate the extent of deployment of assets in

investment as against advances. This ratio is used as a tool to measure the percentage of

total assets locked up in investments, which, by conventional definition, does not form

part of the core income of a bank. It is arrived at by dividing total investments by total

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assets. A higher ratio means that the bank has conservatively kept a high cushion of

investments to guard against NPAs.

4. Net NPAs to Total Assets

It is a measure of the quality of assets in a situation where the management has

not provided for loss on NPAs. Here, the Net NPAs are measured as a percentage of

Total Assets. The lower the ratio, the better is the quality of advances.

5. Percentage Change in Net NPAs

This measure gives the movement in Net NPAs in relation to Net NPAs in the

previous year. The higher the reduction in Net NPAs levels, the better is for the bank. It

is given by the formula: %Change in Net NPAs = (Net NPAs at the end of the year –

Net NPAs at the beginning of the year)/Net NPAs at the beginning of the year.

Management Efficiency

Management efficiency is another vital component of the CAMEL Model that

ensures the survival and growth of a bank. The ratios in this segment involve subjective

analysis and efficiency of management. The management of the bank takes crucial

decisions depending on the risk perception. It sets vision and goals for the organization

and sees that it achieves them. This parameter is used to evaluate management

efficiency as to assign premium to better quality banks and discount poorly managed

ones. The ratios used to evaluate management efficiency are described as under:

1. Total advances to Total Deposits

The ratio measures the efficiency of management in converting the deposits

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

earning advances. Total deposits include demand deposits, savings deposits, term

deposits and deposits of other banks. Total advances also include the receivables.

2. Business per Employee

This tool measures the efficiency of all the employees of a bank in generating

business for the bank. It is arrived at by dividing the total business by total number of

employees. By business, we mean the sum of total deposits and total advances in a

particular year.

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3. Profit per Employee

This ratio measures the efficiency of employees at the branch level. It also gives

valuable inputs to assess the real strength of a bank’s branch network. It is arrived at by

dividing the Profit after Tax (PAT) earned by the bank by the total number of

employees. The higher the ratio, higher is the efficiency of the management.

4. Return on Net Worth

It is a measure of the profitability of a bank. Here, PAT is expressed as a

percentage of Average Net Worth.

Earning Quality

Earning quality reflects quality of a bank’s profitability and its ability to earn

consistently. The quality of earning is a very important criterion that determines the

ability of a bank to earn consistently, going into the future. It basically determines the

profitability of the bank. It also explains the sustainability and growth in earnings in the

future. This parameter gains importance in the light of the argument that much of

bank’s income is earned through non-core activities like investments, treasury

operation, and corporate advisory service and so on. The following ratios try to assess

the quality of income in terms of income generated by core activity-income from

lending operation.

1. Operating Profit to Average Working Funds Ratio

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

operating expenses for every rupee spent on working funds. This is arrived at by

dividing the operating profit by average working funds. Average Working Funds

(AWF) are the total resources (total assets or liabilities) employed by a bank. It is daily

average of total assets / liabilities during a year. The better utilization of funds will

result in higher operating profit. Thus, this ratio will indicate how a bank has employed

its working funds in generating profit.

2. Spread or Net Interest Margin (NIM) to Total Assets

NIM, being the difference between the interest income and the interest

expended as a percentage of total assets. It is an important measure of a bank’s core

income (income from lending operations). A higher spread indicates the better earnings

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given the total assets. Interest income includes dividend income and interest expended

included interest paid on deposits, loan from the RBI, and other short-term and long-

term loans.

3. Net Profit to Average Assets / Return on Average Capital Employed

This ratio measures return on assets employed or the efficiency in utilization of

assets. 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. Thus, this ratio measures the return

on assets employed. Higher ratio indicates better earning potential in the future.

4. Interest Income to Total Income

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

total income indicates the ability of the bank in generating income from its lending.

This ratio measures the income from lending operations as a 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.

5. Non- interest Income to Total Income

This measures the income from operations other than lending as a percentage of

the total income. A fee-based income account for a major portion of a bank’s other

incomes. The bank generates higher fee income through innovative products and

adapting the technology for sustained service levels. Non-interest income is the income

earned by the banks excluding income on advances and deposits with the RBI.

Liquidity

Liquidity is very important for any organization dealing with money. For a

bank, liquidity is a crucial aspect which represents its ability to meet its financial

obligations. It is of utmost importance for a bank to maintain correct level of liquidity,

which will otherwise lead to declined earnings. Banks have to take proper care in

hedging liquidity risk, while at the same time ensuring that a good percentage of funds

are invested in higher return generating investments, so that banks can generate profit

while at the same time provide liquidity to the depositors. Among a bank’s assets, cash

investments are the most liquid. A high liquidity ratio indicates that the bank is more

affluent. The ratios suggested to measure liquidity under CAMEL Model are as

follows:

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1. Liquid Assets to Total Assets

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. This ratio is

arrived by dividing liquid assets by total assets. The proportion of liquid assets to total

assets indicates the overall liquidity position of the bank.

2. Government Securities to Total Assets

Government securities are the most liquid and safe investment. This ratio

measures the proportion of risk-free liquid assets invested in government securities as a

percentage of the assets held by the bank and is arrived by dividing investment in

government securities by the total assets. This ratio measures the risk involved in the

assets held by a bank.

3. Liquid Assets to Demand Deposits

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

deposits in a particular year. It is arrived at by dividing the liquid assets by total

demand deposits. The 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.

4. Liquid Assets to Total Deposits

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

deposits, savings deposits, term deposits and deposits of other financial institutions.

5. Approved Securities to Total Assets

This is arrived at by dividing the total amount invested in approved securities

by total assets. Approved securities are investments made in the state-associated bodies

like electricity boards, housing boards, corporation bonds, share of regional rural banks

(Joshi and joshi,2002; Bodla and Verma, 2006; Sisdiya et al.,2008).

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Bankers' Opinion Regarding Importance of Various Ratios of Capital Adequacy

Under CAMEL Model

CAMEL Model is basically a ratio based Performance Measurement System

based on financial measures for measuring the performance of the banks. It is based on

computation of different ratios to find out ranking of the banks according to their

financial performance. CAMEL Model involves computation of various ratios such as

Capital Adequacy, Asset Quality, Management Efficiency, Earning Quality and

Liquidity of the banks. Different banks used different ratios (relationship) for each

variable of CAMEL Model so as to find out ranking of various banks.

To examine the opinion of bankers regarding the importance of various ratios

under capital adequacy, they were asked to give their opinion about various ratios

under Capital Adequacy. Their response has been presented in Table 6.1. The table

reveals that majority of the bankers considered the capital adequacy ratio (96.50%) as

the most important ratio followed by debt-equity ratio (82.00%), general securities to

total investments (76.00%) and advances to total asset (75.00%).

Table 6.1Opinion of Bankers Regarding Various Ratios under Capital Adequacy

N=200

Ratios Most Important

Important Neither Important

Nor Unimportant

Unimportant Most Unimportant WAS

Capital Adequacy Ratio (CAR)

142(71.0)

51(25.5)

4(2.0)

3(1.5)

0(0.0) 4.28

Debt-equity Ratio

82(41.0)

82(41.0)

28(14.0)

6(3.0)

2(1.0) 4.18

Advances to Total Assets

54(27.0)

96(48.0)

37(18.5)

10(5.0)

3(1.5) 3.94

General Securities to Total Investments

54(27.0)

96(48.0)

39(19.5)

11(5.5)

0(0.0) 3.97

Note: The figures given in parentheses show the percentages.

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Weighted average scores for all the bankers have been calculated by assigning

appropriate weights with regard to all the ratios under capital adequacy norms. The

weighted average scores indicate that all the bankers gave greater importance to all the

listed ratios, viz. capital adequacy (4.28), debt-equity ratio (4.18) followed by general

securities to total investments (3.97) and advances to total assets (3.94).

Further, weighted average scores have also been calculated for the selected

banks. Bank-wise analysis of both public and private sector banks with regard to

importance of various ratios under Capital Adequacy has been presented in Table 6.2.

Table 6.2Weighted Average Scores Corresponding to Various Ratios under Capital

Adequacy(Bank-wise Distribution)

RatiosPublic Sector Banks Private Sector Banks Mean

p-valuesSBI PNB CB Total ICICI AXIS HDFC Total Values

Capital Adequacy Ratio (CAR)

4.06 4.54 4.57 4.38 4.29 3.87 4.34 4.18 4.28 0. 210

Debt-equity Ratio 4.00 4.00 4.30 4.09 4.20 4.17 4.43 4.27 4.18 0.029*

Advances to Total Assets

3.74 3.80 4.17 3.89 4.11 3.77 4.06 3.99 3.94 0.225

General Securities to Total Investments

3.71 3.69 4.17 3.84 4.00 3.77 4.46 4.09 3.97 0.030*

* Significant at 5 per cent level of significance.

An overview of the weighted average scores as shown in the table reveals that

bankers from private sector banks have accorded more importance to all the listed

ratios under Capital Adequacy as compared to those from public sector banks except

capital adequacy. It means public sector banks accord more importance to capital

adequacy ratio which is the premier ratio of measures of Capital Adequacy of CAMEL

framework.

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Table 6.2 reveals that among the selected public sector banks, bankers from

Canara Bank assigned greater significance to all the ratios as compared to SBI and

PNB. Similarly, among the selected private sector banks, bankers from HDFC Bank

gave more importance to ratios like capital adequacy, debt-equity and general securities

to total investments followed by ICICI Bank which accorded more significance to

advances to total assets ratio as is reflected by their respective weighted average scores

for each ratio under capital adequacy measure of CAMEL Model.

The estimated p-values using Mann-Whitney U-test with regard to each ratio of

capital adequacy show that there is a significant difference among public and private

sector banks with regard to debt-equity ratio and general securities to total investments.

As regards other ratios like capital adequacy and advances to total assets ratio, no

significant variations have been observed (p-values>0.05).

The null hypothesis that there is no significant difference in the perception of

public and private sector bankers regarding importance of various ratios of capital

adequacy under CAMEL Model stands accepted regarding ratios, such as capital

adequacy ratio and advances to total assets ratio, but it stands rejected for ratios like

debt-equity ratio and general securities to total investment ratio.

Opinion of Bankers Regarding Importance of Various Ratios of Assets Quality

under CAMEL Model

To ascertain the opinion of bankers regarding importance of Assets Quality in

CAMEL Model, they were asked to give their opinion regarding importance of various

ratios as measures of Assets Quality. The response obtained from the bankers in this

regard has been shown in Table 6.3. The table explains that all the bankers considered

various ratios under assets quality, such as gross NPAs to net advances (96.00%) and

net NPAs to net advances (92.50%) as the most important ratios followed by

percentage change in net NPAs (89.00%), net NPAs to total assets (86.50%), and total

investments to total assets (80.50%).

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Table 6.3Opinion of Bankers Regarding Various Ratios under Assets Quality

N=200

Ratios Most Important

Important Neither important

nor unimportan

t


Gross NPAs to Net Advances

132(66.0)

60(30.0)

8(4.0)

0(0.0)

0(0.0)

4.61

Net NPAs to Net Advances

129(64.5)

56(28.0)

14(7.0)

1(0.5)

0(0.0)

4.56

Total Investments to Total Assets

76(38.0)

85(42.5)

37(18.5)

2(1.0)

0(0.0)

4.15

Net NPAs to Total Assets

111(55.50)

62(31.0)

25(12.5)

2(1.0)

0(0.0)

4.39

Percentage Change in Net NPAs

125(62.5)

53(26.5)

19(9.5)

3(1.5)

0(0.0)

4.41

Note: The figures given in parentheses denote the percentages.

It is pertinent to note that only negligible number of bankers have considered

the ratios like percentage change in net NPAs (1.50%) followed by total investments to

total assets and net NPAs to total assets (1.00% each) and net NPAs to net advances

(0.50%) as unimportant to indicate the assets quality of the banks under CAMEL

framework.

Weighted average scores have been calculated for all the bankers with regard to various ratios under assets quality by putting appropriate weights. On the basis of weighted average scores, bankers considered all the ratios as important for measuring assets quality of the banks, such as gross NPAs to net Advances (4.61) and net NPAs to net advances (4.56) followed by percentage change in net NPAs (4.41), net NPAs total assets (4.39) and total investments to total assets (4.15).

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Further, weighted average scores have also been computed for the selected

banks under study. Bank-wise analysis of both public and private sector banks with

regard to various ratios as indicator of assets quality has been presented in Table 6.4.

The weighted average scores presented in the table reveal that public sector banks have

accorded greater significance to all these ratios of assets quality as compared to private

sector banks except total investment to total assets.

Table 6.4

Weighted Average Scores Corresponding to Various Ratios under Assets Quality(Bank-wise Distribution)

Ratios Public Sector Banks Private Sector Banks Mean p-valuesSBI PNB CB Total ICICI AXIS HDFC Total ValuesGross NPAs to Net Advances

4.69 4.86 4.57 4.71 4.49 4.60 4.46 4.51 4.61 0.045*

Net NPAs to Net Advances

4.77 4.66 4.70 4.71 4.40 4.43 4.37 4.40 4.56 0.007*

Total Investments to Total Assets

3.77 4.09 4.40 4.07 4.43 4.13 4.09 4.22 4.15 0.098

Net NPAs to Total Assets

4.11 4.60 4.67 4.45 4.57 4.23 4.17 4.33 4.39 0.259

Percentage Change in Net NPAs

4.34 4.69 4.53 4.52 4.63 4.10 4.14 4.30 4.41 0.154


Among the selected public sector banks, there has been a mixed response to the

different ratios under assets quality. The bankers from PNB accorded greater

importance to gross NPAs to net advances (4.86) and percentage change in net NPAs

(4.69), while bankers from SBI accorded importance to net NPAs to net advances

(4.77). Ratios like total investment to total assets (4.40) and net NPAs to total assets

(4.67) considered more important by the bankers from Canara Bank. Similarly, among

the selected private sector banks, bankers from ICICI Bank accorded importance to

ratios like total investments to total assets (4.43), percentage change in net NPAs (4.63)

and net NPAs to total assets (4.57) followed by Axis Bank considering gross NPAs to

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net advances (4.60) and net NPAs to net advances (4.43) as most important ratios as

indicator of assets quality of the banks under the CAMEL framework.

The estimated p-values using Mann-Whitney U-test with regard to various

ratios under assets quality show that there is a significant difference among pubic and

private sector banks with regard to ratios, such as gross NPAs to net advances and net

NPAs to net advances under the measure of assets quality of CAMEL framework (p-

values < 0.05). Bankers from public sector banks gave more importance to these ratios

of assets quality as compared to private sector banks. For rest of the ratios of assets

quality, such as total investment to total assets, net NPAs to total assets and percentage

change in net NPAs, no significant difference among public and private sector banks

have been observed (p-values > 0.05). In other words, both the banks assigned equal

importance to the above mentioned ratios of assets quality as a measure of CAMEL

framework.


public and private sector bankers regarding importance of various ratios of assets

quality under CAMEL Model stands accepted in all other ratios except gross NPAs to

net Advances and net NPAs to net Advances.

Bankers Opinion Regarding Various Ratios of Management Efficiency Uunder

CAMEL Framework

The importance of various ratios under the Management Efficiency as a

measure of CAMEL framework has been examined on the basis of response obtained

from the Bankers in this regard. The data pertaining to their response has been

presented in Table 6.5. The table shows that majority of the bankers considered all the

ratios important, but total advances to total deposits (93.00%) and business per

employee (88.50%) appeared as the most important ratios of management efficiency

under CAMEL framework.

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Table 6.5Bankers Opinion Regarding Various Ratios under Management Efficiency

N=200Ratios Most

ImportantImportant Neither

Important Nor

Unimportant

Unimportant Most Unimportant

WAS

Total Advances to Total Deposits

122(61.0)

64(32.0)

13(6.5)

1(0.5)

0(0.0)

4.54

Return on Net Worth

117(58.5)

56(28.0)

22(11.0)

5(2.5)

0(0.0)

4.43

Business per Employee

126(63.0)

51(25.5)

17(8.5)

5(2.5)

1(0.5)

4.48

Profit per employee

125(62.5)

49(24.5)

23(11.5)

1(0.5)

2(1.0)

4.47

Note: The figures given in parentheses indicate the percentages.

Weighted average scores have been calculated for all the bankers regarding various ratios as measure of management efficiency by assigning appropriate weights. An overview of weighted average scores as shown in Table 6.5 reveals that bankers considered all the ratios, viz. total advances to total deposits (4.54), business per employee (4.48), profit per employee (4.47) and return on net worth (4.43) as important.

Further, bank-wise weighted average scores have also been calculated with regard to public and private sector banks and presented in Table 6.6. The table reveals that public sector banks provided greater significance to all the ratio of management efficiency in comparison to private sector banks as is evident from their weighted average scores. Among the selected public sector banks, bankers from all the three banks under study gave importance to different ratios of management efficiency as a measure of CAMEL model. PNB accorded more importance to total advances to total deposits (4.63) and business per employee and profit per employee (4.71 each) followed by Canara Bank which accorded importance to return on net worth (4.80).

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Table 6.6Weighted Average Scores Corresponding to Various Ratios under Management

Efficiency(Bank-wise Distribution)

Ratios Public Sector Banks Private Sector Banks Meanp-values

SBI PNB CB Total ICICI AXIS HDFC Total Values

Total Advances to total deposits

4.46 4.63 4.57 4.55 4.71 4.60 4.26 4.52 4.54 0.905

Return on Net Worth

4.46 4.40 4.80 4.54 4.51 4.03 4.34 4.31 4.43 0.163

Business per employee

4.51 4.71 4.63 4.62 4.37 4.43 4.23 4.34 4.48 0.004*

Profit per employee 4.31 4.71 4.57 4.53 4.43 4.37 4.43 4.41 4.47 0.194


Similarly, among private sector banks, ICICI Bank gave more importance to all

the listed ratios for measuring management efficiency except business per employee as

compared to Axis Bank and HDFC Bank as shown by their respective weighted

average scores. The Axis Bank gave importance to business per employee (4.43) as a

measure of management efficiency when compared with other selected private sector

banks. However, it is pertinent to note that HDFC Bank also assigned more importance

to profit per employee (4.43).

The estimated p-values using Mann-Whitney U-test with regard to all the listed

ratios of management efficiency show that there is a significant difference among the

public and private sector banks as far as business per employee ratio is concerned (p-

value<0.05). Bankers from the public sector banks gave more importance to business

per employee ratio as a measure of management efficiency as compared to the private

sector banks as is evident from their weighted average scores. Regarding other

measures of management efficiency like total advances to total deposits, return on net

worth and profit per employee, no significant difference between public and private

sector banks has been observed. Both the banks accorded equal importance to the above

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mentioned measures of management efficiency as a measure of CAMEL framework.

Thus, the null hypothesis that there is no significant difference in the perception of

public and private sector bankers regarding importance of various ratios of

management efficiency under CAMEL Model stands accepted except business per

employee.

Opinion of Bankers Regarding Importance of Various Ratios as a Measure of

Earning Quality of the Banks under CAMEL Model

The significance of various ratios under the Earning Quality as a measure of

CAMEL framework has been examined on the basis of response obtained from the

bankers in this regard The data pertaining to their response has been presented in Table

6.7.

Table 6.7Opinion of Bankers Regarding Various Ratios under Earning Quality

N=200Ratios Most


Important Nor

Unimportant


Operating Profits to Average Working Funds

99(49.5)

76(38.0)

21(10.5)

4(2.0)

0(0.0) 4.35

Spread 107

(53.5)62

(31.0)25

(12.5)5

(2.5)1

(0.5)4.35

Net Profit to Average Assets

79(39.5)

87(43.5)

22(11.0)

11(5.5)

1(0.5)

4.16

Interest Income to Total Income

74(37.0)

101(50.5)

20(10.0)

4(2.0)

1(0.5)

4.22

Non-interest Income to Total Income

94(47.0)

80(40.0)

22(11.0)

1(0.5)

3(1.5)

4.31

Note: The figures given in parentheses show the percentages.

206


The table shows that all the bankers have considered all the ratios of earning

quality, such as operating profits to average working funds and interest income to total

income (87.50% each) followed by non-interest income to total income (87.00%),

spread (84.50%) and net profit to average assets (83.00%) as important to judge the

earning quality of the banks. Weighted average scores have been computed for all the

bankers with regard to various ratios as indicator of earning quality by assigning

appropriate weights. The weighted average scores reveal that bankers considered all the

ratios as important measure of earning quality of the banks, such as operating profits to

average working funds and spread (4.35 each) followed by non-interest income to total

income (4.31), interest income to total income (4.22) and net profit to average assets

(4.16).

Table 6.8Weighted Average Scores Corresponding to Various Ratios under Earning

Quality(Bank-wise Distribution)

Ratios Public Sector Banks Private Sector Banks Mean p-valuesSBI PNB CB Total ICICI AXIS HDFC Total ValuesOperating Profits to Average Working Funds

4.43 4.34 4.27 4.35 4.46 4.13 4.43 4.35 4.35 0.725

Spread 4.54 4.51 4.73 4.59 4.20 3.77 4.29 4.10 4.35 0.000*

Net Profit to Average Assets

4.23 4.26 4.50 4.32 4.23 3.83 3.91 4.00 4.16 0.024*

Interest Income to Total Income

4.06 4.26 4.50 4.26 4.17 4.17 4.17 4.17 4.22 0.645

Non-interest Income to Total Income

4.43 4.54 4.53 4.50 4.26 4.23 3.86 4.11 4.31 0.001*


Further, weighted average scores have also been calculated for the selected banks of the study. Bank-wise analysis of both public and private sector banks regarding various ratios as a measure of earning quality have been presented in Table

207


6.8. The table explains that weighted average scores of public sector banks against all the ratios are higher as compared to the private sector banks.

Among the selected public sector banks, bankers from Canara Bank considered

all the ratios, viz. spread (4.73), non-interest income to total income (4.54) and net-

profit to average asset and interest income to total income (4.50 each) except operating

profits to average working funds (4.43) ratio, which is considered by the bankers of

SBI. Further, among the selected private sector banks, bankers from ICICI Bank gave

more importance to all the ratios as a measure of earning quality except spread as

compared to Axis Bank and HDFC Bank as shown by their weighted average scores.

Bankers from HDFC Bank provided greater significance to spread (4.29) as compared

to other two selected private sector banks.


ratios of earning quality show that there is a significant difference among public and

private sector banks as regards ratios like spread, net profit to average assets and non-

interest income to total income (p-values<0.05). Bankers from public sector banks gave

more importance to these ratios as a measure of earning quality when compared with

the Bankers from private sector banks. For rest of the measures of earning quality such

as operating profits to average working funds and interest income to total income, no

significant variations between public and private sector banks have been observed (p-

values >0.05). Both the banks accorded equal importance to these measures of earning

quality as a measure of CAMEL framework.


public and private sector bankers regarding importance of various ratios of earning

quality under CAMEL Model stands accepted in ratios, such as operating profits to

average working funds and interest income to total income ratio. However, it stands

rejected for ratios like spread, net profit to average assets and non-interest income to

total income ratio.

Bankers Opinion Regarding Various Ratios of Liquidity as a Measure of CAMEL

Framework

To examine the opinion of bankers regarding the importance of various ratios of

Liquidity as a measure of CAMEL framework, they were asked to give their opinion

about all the listed ratios such as liquid assets to total assets, general securities to total

208


assets, approved securities to total assets, liquid assets to demand deposits, and liquid

assets to total deposits. The response obtained from the bankers in this regard has been

presented in Table 6.9.

Table 6.9Bankers’ Opinion Regarding Various Ratios under Liquidity

N=200Ratios Most


Important Nor

Unimportant

Unimportant Most Unimportant

WAS

Liquid Assets to Total Assets

111(55.5)

70(35.0)

18(9.0)

0(0.0)

1(0.5)

4.45

General Securities to Total Assets

46(23.0)

98(49.0)

41(20.5)

12(6.0)

3(1.5)

3.86

Approved Securities to Total Assets

65(32.5)

86(43.0)

38(19.0)

7(3.5)

4(2.0)

4.01

Liquid Assets to Demand Deposits

88(44.0)

75(37.5)

27(13.5)

8(4.0)

2(1.0)

4.20

Liquid Assets to Total Deposits

82(41.0)

85(42.5)

28(14.0)

3(1.5)

2(1.0)

4.21

Note: The figures given in parentheses denote the percentages.

The table shows that the bankers have considered all the ratios of liquidity

important. But the ratios, such as liquid assets to total assets (90.50%) and liquid assets

to total deposits (83.50%) have been more important followed by liquid assets to

demand deposits (81.50%), approved securities to total assets (75.50%) and general

securities to total assets (72.00%). All these ratios depict the liquidity position of the

banks.

Weighted average scores have been calculated for all the bankers with regard to

various ratios as a measure of liquidity of the banks by assigning appropriate weights.

A glance at the weighted average scores given in Table 6.9 reveals that bankers

considered the ratios, such as liquid assets to total assets (4.45), liquid assets to total

deposits (4.21) and liquid assets to demand deposits (4.20) as more important and

209


approved securities to total assets (4.01) and general securities to total assets (3.86) as

important.

Further weighted average scores have also been calculated for the selected

banks under study. Bank-wise analysis regarding various ratios as a measure of

liquidity under CAMEL Model has been presented in Table 6.10.

Table 6.10

Weighted Average Scores Corresponding to Various Ratios under Liquidity

(Bank-wise Distribution)Ratios Public Sector Banks Private Sector Banks Mean p-valuesSBI PNB CB Total ICICI AXIS HDFC Total Values

Liquid Assets to Total Assets

4.54 4.54 4.63 4.57 4.40 4.30 4.29 4.33 4.45 .010*

General Securities to Total Assets

3.63 3.77 4.00 3.79 4.11 3.70 3.94 3.93 3.86 .242

Approved Securities to Total Assets

3.69 3.86 4.27 3.92 4.31 3.87 4.06 4.09 4.01 .139

Liquid Assets to Demand Deposits

4.31 4.23 4.63 4.38 4.17 3.90 3.94 4.01 4.20 .003*

Liquid Assets to Total Deposits

4.29 4.23 4.43 4.31 4.26 4.00 4.06 4.11 4.21 .249


The table shows that both the public and private sector banks have given

importance to different ratios. The public sector banks gave more importance to liquid

assets to total assets (4.57), liquid assets to demand deposits (4.38) and liquid assets to

total deposits (4.31) followed by private sector banks which accorded importance to

other ratios, such as approved securities to total assets (4.09) and general securities total

assets (3.93).

Among the selected public sector banks, bankers from Canara Bank accorded

more importance to all the listed measures when compared to other selected public

sector banks, such as SBI and PNB as indicated by their respective weighted average

210


scores. Similarly, among the selected private sector banks, bankers from ICICI Bank

accorded greater significance to various ratios in comparison to Axis Bank and HDFC

Bank as measures of liquidity as shown by their respective weighted average scores.


ratios of liquidity show that there is a significant difference among public and private

sector banks as far as ratios like liquid assets to total assets and liquid assets to

demand deposits (p-values<0.05) are concerned. Bankers from public sector banks

accorded more importance to these ratios (measures) of liquidity as compared to those

from private sector banks. As far as other ratios like general securities to total assets,

approved securities to total assets and liquid assets to total deposits, no significant

variations between public and private sector banks have been observed. Both the banks

gave equal significance to these ratios of liquidity as a measure of CAMEL framework.


public sector and private bankers regarding importance of various ratios of liquidity

under CAMEL Model stands accepted in all other ratios except liquid assets to total

assets and liquid assets to demand deposits.

The above analysis provides that both the public and private sector bankers

accorded importance to various measures of CAMEL Model. An overview of all the

measures, such as Capital Adequacy, Assets Quality, Management Efficiency, Earning

Quality and Liquidity brings out that bankers from public sector considered these

measures as well as various ratios under these measures more important for measuring

the performance of the banks. In respect to Capital Adequacy parameters, there is a

significance difference in the opinion of public and private sector bankers. The private

sector banks accorded more importance to all the ratios under Capital Adequacy as

measure of CAMEL Framework except capital adequacy ratio which is considered to

be a premier ratio. The public sector bankers assigned more significance to this ratio of

Capital Adequacy. With regard to importance of other measures of CAMEL Model,

such as Assets Quality, Management Efficiency and Earning Quality, bankers from

public sector gave more significance to all the ratios under these measures as compared

to the private sector bankers. Regarding Liquidity measure of CAMEL Framework,

public sector bankers gave more significance to all the ratios except general securities

to total assets. The study shows that when these results were compared with the actual

overall composite ranking of both public and private sector banks for the last 5 years,

211


much compatibility has been observed. The overall ranking for the period shows that

public sector banks have shown an improvement, while in the case of private sector

banks composite rank has been slipped from top to bottom as shown in Table 6.11.

Table 6.11

Overall Composite Ranking of Public and Private Sector Banks for the Last Five Years in CAMEL Framework

YearPublic Sector Banks Private Sector Banks

SBI PNB CB ICICI AXIS HDFC2004-05 8 3 16 1 3 22005-06 18 9 10 4 14 32006-07 23 19 12 9 12 72007-08 21 9 17 14 13 122008-09 21 2 13 10 8 6

Source: Chartered Financial Analyst, The Analyst, Various Special Issues, October.

As far as selected public sector banks are concerned, composite rank in case of

PNB stands at number 2nd whereas that of Canara Bank improved from 17th to 13th. The

SBI Bank maintained the same position for the last 2 years at 21st rank. On the other

hand, among the selected private sector banks, ICICI Bank, HDFC Bank and Axis

Bank slipped from top three ranks to 10th rank, 6th rank and 8th rank respectively.

On the whole, it is observed that public sector banks outperformed private

sector banks with regard to CAMEL framework as a method of measuring and

managing performance of the bank under financial measure.

212


References

Bodla, B.S.; and Verma, R. (2006), “Evaluating Performance of Banks through

CAMEL Model: A Case Study of SBI and ICICI”, The ICFAI Journal of Bank

Management, Vol.5, No.3, pp. 49-63.

Joshi and Joshi (2002), Managing Indian Banks: The Challenges Ahead, Second

Edition, Response Books, A Division of Sage Publications- New Delhi,

pp.109-110.

Satish, D.; Jutur, S.; and Surender, V. (2005), “Indian Banking Performance and

Development 2004-05”, Chartered Financial Analyst, Special Issue, October,

pp.6-29.

Satish, D.; and Bharathi, Y. Bala (2006), “Indian Banking Coming of Age –

Performance Snapshot 2005-2006”, Charted Financial Analyst, Special Issue,

October, pp.6-30.

Sisodiya, A. S.; Bharathi, Y. Bala.; and Kavitha, P. (2007), “Indian Banking Sector of

Performance, Progress and Challenges”, Chartered Financial Analyst, Special

Issue, October, pp.26-56.

Sisodiya, A. S.; Bharathi, Y. Bala.; and Moghal, I. (2008), “Indian Banking Industry:

Sustaining the Growth Momentum”, Chartered Financial Analyst, Special

Issue, October, pp.34-61.

Sisodiya, A. S.; and Pemmaraju, R. (2009), “Indian Banking Sector: Signs of

Resilience”, Chartered Financial Analyst, Special Issue, October, pp.26-52.

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