ANALYSE THE PERFORMANCE OF THE BANKS BY USING CAMEL

MODEL

Prepared By.Issan shah (107960592121)

Bhavik shah(107960592040)

Introduction to Banking Sector :- Definition of Bank :-

The Banking Companies act, 1949 as one “ which transacts the business of banking which means the accepting , for the purpose of lending or investment , of deposits of money from public, repayable on demand or otherwise and withdraw able by cheque, draft, order, or otherwise.”

Banking system :-

1. Public Sector Bank 2. Private Sector Bank

Structure of Banking System in India :-

Reserve Bank of India

Scheduled Bank

Co-Operative Bank

Non-Scheduled Bank

Private Sector Bank Public Sector Bank

Foreign Bank

Regional Rural BankOther Nationalized Bank

Indian Bank

Commercial Bank

SBI and Subsidiaries Banks

Central Co-Operative Bank

State Co-Operative Bank

The Banks selected for the Study :-

Public Sector :-

1. SBI Bank 2. Bank of India

Private Sector Bank :-

1. HDFC Bank 2. ICICI Bank

Research and Methodology ObjectivesTo make a comparative study of performance of Banks by using camel modelAN investor who would like to be rational and scientific in his investment activity has to evaluate a lot of information about past performance and the expected future performance of the companies, industries and the economy as a whole before taking the investment decision and hence, the present study attempts to analyze the position of the sample companies.Some of the objectives of conducting the study are as follows:•To take investment decision cautiously after studying risks involved in the same.•To gain knowledge of evaluating intrinsic value of a firm.•To acquire practical exposure of financial analysis of an enterprise.•To get familiarity of scheming comparative efficiency of different firms.•To analyse the profitability position of sample banks.

Methodology

The traditional set of ratios like Gross Profit Ratio , Stock Turnover Ratio ,Debtors Ratio , Net Profit Ratio , Credit Ratio etc. cannot be applied to study the Financial Performance of Banks.

CAMEL MODEL This model is recommended by Padmanabhan Committee (1995) :-

Appointed by RBI in 1995 to suggest changes in the approach and style of

inspection and follow up by the Central Bank, under the chairmanship of

S. padmanabhan (Former Chairman of Indian Overseas Bank).

Recommendations are yet to be accepted by RBI. The major

recommendations are:

Ongoing supervision:-

Shift from current system of periodical inspection to ongoing or continuous

supervision.

CAMEL Rating Model:-

Each Bank should be raised on a five score scale A to E indicating in

descending order the soundness and strength of the bank.

For Indian banks the rating will be based on five parameters (C.A.M.E.L.)

Rating

SymbolRating symbol indicates

A Bank is sound in every respect

B Bank 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.

• Capital Adequacy : Staying power• Asset Quality : Bank’s lending decisions

determine the level of credit risk.• Management : Must have administrative skills

and ability to cope with existing regulations and a changing environment.

• Earnings: Bank’s earnings over time and in comparison to others in the industry should show a positive trend.

• Liquidity : If depositors start withdrawing, there could be a problem.

Capital Adequacy:1.Capital Adequacy RatioThe higher the CAR means the stronger the bank. Capital Adequacy Ratio=Capital (Tier I, II) / Risk Weighted Assets * 100. [Tier I = Equity Capital + Free Reserves] [ Tier II: Debt of 5-7 years]2. Debt-Equity RatioDebt – Equity Ratio= Total Borrowings and Deposits / Shareholder’s Net Worth. [Shareholder’s Net Worth = Eq. Capital +Reserves +Surplus]3. Advances to Assets RatioTotal Advances to Total Assets Ratio=Total Advances / Total Assets. [Total Advances = Advances + Receivables] [Total Assets =Total Assets – Revaluation of Assets]4. Govt.-securities to Total Investment RatioIt is arrived at by dividing the amount invested in Government Securities by Total Investments. Government Securities to Total Investment Ratio = Amt. Invested in Govt. Securities / Total Investment

Assets Quality1. Net NPAs to Total Assets (NNPAs/TA) Ratio2. Net NPAs to Net Advances (NNPAs/NA) Ratio3. Total Investments to Total Assets (TI/TA) Ratio Management Efficiency 1. Total Advances to Total Deposits(TA/TD) Ratio•[Total Advances = Advances + Receivables] [Total Deposits = Demand + Saving + Term + Others]2. Profit Per Employee(PPE) Ratio •It is arrived at by dividing the Net Profit of the bank by Total Number of Branches. Profit per Employee (PPE) Ratio = Net Profit / Total No. of Branches

3. Business Per Employee (BPE) Ratio •It is arrived at by dividing the Total Business by the Total Number of Employees. Business per Employee (BPE) Ratio = Total Business / Total No. of Employees. [Total Business = Total Advances + Total Deposits]

4. Return on Net Worth Ratio•It is arrived at by dividing the Profit after Tax by Share Holder’s Net Worth. Return on Net worth Ratio = PAT / Share Holder’s Net Worth * 100. [PAT = Profit after Tax] [Share Holder’s Net Worth = Eq. Capital + Reserves and Surpluses]

Earnings Quality1. Operating Profit by Avg. Working Funds Ratio •This is arrived at by dividing the Operating Profit by Avg. Working Funds, working Funds or the Daily Avg. of Total Assets during the year. Operating Profit by Avg. Working Funds Ratio = Operating Profit / Avg. Working Funds2. Net Profit / Average Assets (PAT/AA) Ratio 3. Interest Income / Working Funds Ratio•This ratio measures the income from lending operations as a percentage of the working funds in a year. It is arrived at by dividing the Interest Income by Working Funds. Interest Income / Working Funds Ratio = Interest Income / Working Funds. [Interest Income = Income on Advances + Income on Deposit with RBI + Dividend Income]4. Non Interest Income / Working Funds(NII/WF) Ratio•This ratio measures the Operation from other than lending operations as a percentage of working funds. Non-Interest Income is the Interest earned by the banks excluding income on advances and deposits with RBI.

Liquidity

1. Liquid Assets / Demand Deposits (LA/DD) Ratio

2. Liquid Assets to Total Deposits (LA/TD) Ratio

3. Liquid Assets to Total Assets (LA/TA) Ratio

4. Government Securities to Total Assets (G-Secs/TA) Ratio

5. Approved Securities to Total Assets Ratio