REPORT On To study the strength of using CAMELS framework as a tool of performance evaluation for banking institutions

Under the supervision of:

Submitted By: Chandni Mehra

DECLARATION

I hereby state that the dissertation entitled To study the strength of using CAMELS framework as a tool of performance evaluation for banking institutions submitted by me in partial fulfillment of the requirements for the diploma of PGPM is my original work and that it has not previously formed the basis for the award of any other Degree, Diploma, Fellowship or other similar titles.

STATEMENT OF THE PROBLEM In the recent years the financial system especially the banks have undergone numerous changes in the form of reforms, regulations & norms. CAMELS framework for the performance evaluation of banks is an addition to this. The study is conducted to analyze the pros & cons of this model.

OBJECTIVES OF STUDY To do an in-depth analysis of the model. To analyze 3 banks to get the desired results by using CAMELS as a tool of measuring performance.

RESEARCH PROPOSAL The Bank after the implementation of the balanced scorecard in 2002 has under gone a drastic change. Both its peoples and process perspectives have changed visibly and the employees have full faith in the new strategy to produce quick results and keep them ahead in the industry. The balanced scorecard approach has brought about more role clarity in the job profile and has improved processes. In short it focuses not only on short term goals but is very clear about its way to achieve the long term goal.

SCOPE OF THE RESEARCH To study the strength of using CAMELS framework as a tool of performance evaluation for banking institutions. Type of research: Descriptive

METHODOLOGY i) AREA OF SURVEY: The survey was done for three banks. The study environment was the Banking industry. ii) DATA SOURCE: Primary Data: Primary data was collected from the company balance sheets and company profit and loss statements. Secondary Data: Secondary data on the subject was collected from ICFAI journals, company prospectus, company annual reports and IMF websites.

iii) SAMPLING TECHNIQUE : Convenience sampling: Convenience sampling was done for the selection of the banks.

iv) PLAN OF ANALYSIS: The data analysis of the information got from the balance sheets was done and ratios were used. Graph and charts were used to illustrate trends.

LIMITATIONS OF THE STUDY 1) The study was limited to three banks. 2) Time and resource constrains.

3) The method discussed pertains only to banks though it can be used for performance evaluation of other financial institutions. 4) The study was completely done on the basis of ratios calculated from the balance

sheets. 5) It has not been possible to get a personal interview with the top management

employees of all banks under study.

INTRODUCTION TO THE BANKING REFORMS In 1991, the Indian economy went through a process of economic liberalization, which was followed up by the initiation of fundamental reforms in the banking sector in 1992. The banking reform package was based on the recommendations proposed by the Narsimhan Committee Report (1991) that advocated a move to a more market oriented banking system, which would operate in an environment of prudential regulation and transparent accounting. One of the primary motives behind this drive was to introduce an element of market discipline into the regulatory process that would reinforce the supervisory effort of the Reserve Bank of India (RBI). Market discipline, especially in the financial liberalization phase, reinforces regulatory and supervisory efforts and provides a strong incentive to banks to conduct their business in a prudent and efficient manner and to maintain adequate capital as a cushion against risk exposures. Recognizing that the success of economic reforms was contingent on the success of financial sector reform as well, the government initiated a fundamental banking sector reform package in 1992. Banking sector, the world over, is known for the adoption of multidimensional strategies from time to time with varying degrees of success. Banks are very important for the smooth functioning of financial markets as they serve as repositories of vital financial information and can potentially alleviate the problems created by information asymmetries. From a central banks perspective, such high-quality disclosures help the early detection of problems faced by banks in the market and reduce the severity of market disruptions. Consequently, the RBI as part and parcel of the financial sector deregulation, attempted to enhance the transparency of the annual reports of Indian banks by, among other things, introducing stricter income recognition and asset classification rules, enhancing the capital adequacy norms, and by requiring a number of additional disclosures sought by investors to make better cash flow and risk assessments. During the pre economic reforms period, commercial banks & development financial institutions were functioning distinctly, the former specializing in short & medium term financing, while the latter on long term lending & project financing.

Commercial banks were accessing short term low cost funds thru savings investments like current accounts, savings bank accounts & short duration fixed deposits, besides collection float. Development Financial Institutions (DFIs) on the other hand, were essentially depending on budget allocations for long term lending at a concessionary rate of interest. The scenario has changed radically during the post reforms period, with the resolve of the government not to fund the DFIs through budget allocations. DFIs like IDBI, IFCI & ICICI had posted dismal financial results. In fact, their very viability has become a question mark. Now they have taken the route of reverse merger with IDBI bank & ICICI bank thus converting them into the universal banking system. RBI guidelines for CAMEL FRAMEWORK of Banks: Basel Committee The Basel Committee on Banking Supervision, which is a committee of banking supervisory authorities of G-10 countries, has been in the forefront of the international attempt in the development of standards and the establishment of a framework for bank supervision towards strengthening international financial stability. In 1997, in consultation with the supervisory authorities of a few non G-10 countries including India, it drew up the 25 Core Principles for Effective Banking Supervision which were in the nature of minimum requirements intended to guide supervisory authorities which were seeking to strengthen their current supervisory regime. Being one of the central banks which was involved in the exercise of drawing up the Core principles, the Reserve Bank of India had assessed its own position with respect to these principles in 1998. The assessment had shown that most of the Core Principles were already enshrined in our existing legislation or current regulations. Gaps had been identified between existing practice and principle mainly in the areas of risk management in banks, inter-agency cooperation with other domestic/international regulators and consolidated supervision. Internal working groups were set up to suggest measures to bridge these gaps and their recommendations have been accepted by the Board for financial Supervision and are now in the process of being implemented. Given the spread and reach of the Indian banking system, with over 60,000 branches of more than 100 banks, implementation is a challenge for the supervisors. However, the Reserve Bank of India is committed to the full implementation of the Core Principles. The Bank also serves on the Core Principles Liaison Group of the BCBS, which has been formed to promote the timely and complete implementation of these principles worldwide. It gives me great pleasure to release this document which is intended to provide the reader with a framework within which one can view the developments in the Indian Banking System in a proper perspective. The document reflects the position as

existing on date and will be updated to reflect future changes. As supervision is a dynamic process, readers may refer to the Reserve Bank of India for the latest position or for any clarifications. BASEL II ACCORD Bank capital framework sponsored by the world's central banks designed to promote uniformity, make regulatory capital more risk sensitive, and promote enhanced risk management among large, internationally active banking organizations. The International Capital Accord, as it is called, will be fully effective by January 2008 for banks active in international markets. Other banks can choose to "opt in," or they can continue to follow the minimum capital guidelines in the original Basel Accord, finalized in 1988. The revised accord (Basel II) completely overhauls the 1988 Basel Accord and is based on three mutually supporting concepts, or "pillars," of capital adequacy. The first of these pillars is an explicitly defined regulatory capital requirement, a minimum capital-to-asset ratio equal to at least 8% of risk-weighted assets. Second, bank supervisory agencies, such as the Comptroller of the Currency, have authority to adjust capital levels for individual banks above the 8% minimum when necessary. The third supporting pillar calls upon market discipline to supplement reviews by banking agencies. Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. The purpose of Basel II, which was initially published in June 2004, is to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face. Advocates of Basel II believe that such an international standard can help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse. In practice, Basel II attempts to accomplish this by setting up rigorous risk and capital management requirements designed to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices. Generally speaking, these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability. The final version aims at: 1. Ensuring that capital allocation is more risk sensitive; 2. Separating operational risk from credit risk, and quantifying both; 3. Attempting to align economic and regulatory capital more closely to reduce the scope for regulatory arbitrage. While the final accord has largely addressed the regulatory arbitrage issue, there are still areas where regulatory capital requirements will diverge from the economic.

Basel II has largely left unchanged the question of how to actually define bank capital, which diverges from accounting equity in important respects. The Basel I definition, as modified up to the present, remains in place. The Accord in operation Basel II uses a "three pillars" concept (1) minimum capital requirements (addressing risk), (2) supervisory review and (3) market discipline to promote greater stability in the financial system. The Three Pillars of Basel II

The Basel I accord dealt with only parts of each of these pillars. For example: with respect to the first Basel II pillar, only one risk, credit risk, was dealt with in a simple manner while market risk was an afterthought; operational risk was not dealt with at all.

The First Pillar The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: credit risk, operational risk and market risk. Other risks are not considered fully quantifiable at this stage. The credit risk component can be calculated in three different ways of varying degree of sophistication, namely standardized approach, Foundation IRB and Advanced IRB. IRB stands for "Internal Rating-Based Approach". For operational risk, there are three different approaches - basic indicator approach or BIA, standardized approach or TSA, and advanced measurement approach or AMA. For market risk the preferred approach is VaR (value at risk). As the Basel 2 recommendations are phased in by the banking industry it will move from standardised requirements to more refined and specific requirements that have been developed for each risk category by each individual bank. The upside for banks that do develop their own bespoke risk measurement systems is that they will be rewarded with potentially lower risk capital requirements. In future there will be closer links between the concepts of economic profit and regulatory capital. Credit Risk can be calculated by using one of three approaches 1. Standardized Approach 2. Foundation IRB (Internal Ratings Based) Approach 3. Advanced IRB Approach The standardized approach sets out specific risk weights for certain types of credit risk. The standard risk weight categories are used under Basel 1 and are 0% for short term government bonds, 20% for exposures to OECD Banks, 50% for residential mortgages and 100% weighting on commercial loans. A new 150% rating comes in for borrowers with poor credit ratings. The minimum capital requirement( the percentage of risk weighted assets to be held as capital) remains at 8%. For those Banks that decide to adopt the standardized ratings approach they will be forced to rely on the ratings generated by external agencies. Certain Banks are developing the IRB approach as a result. The Second Pillar The second pillar deals with the regulatory response to the first pillar, giving regulators much improved 'tools' over those available to them under Basel I. It also provides a framework for dealing with all the other risks a bank may face, such as systemic risk,

pension risk, concentration risk, strategic risk, reputation risk, liquidity risk and legal risk, which the accord combines under the title of residual risk. It gives banks a power to review their risk management system.

The Third Pillar The third pillar greatly increases the disclosures that the bank must make. This is designed to allow the market to have a better picture of the overall risk position of the bank and to allow the counterparties of the bank to price and deal appropriately. The new Basel Accord has its foundation on three mutually reinforcing pillars that allow banks and bank supervisors to evaluate properly the various risks that banks face and realign regulatory capital more closely with underlying risks. The first pillar is compatible with the credit risk, market risk and operational risk. The regulatory capital will be focused on these three risks. The second pillar gives the bank responsibility to exercise the best ways to manage the risk specific to that bank. Concurrently, it also casts responsibility on the supervisors to review and validate banks risk measurement models. The third pillar on market discipline is used to leverage the influence that other market players can bring. This is aimed at improving the transparency in banks and improves reporting.

The CAMELS FRAMEWORK During an on-site bank exam, supervisors gather private information, such as details on problem loans, with which to evaluate a bank's financial condition and to monitor its compliance with laws and regulatory policies. A key product of such an exam is a supervisory rating of the bank's overall condition, commonly referred to as a CAMELS rating. This rating system is used by the three federal banking supervisors (the Federal Reserve, the FDIC, and the OCC) and other financial supervisory agencies to provide a convenient summary of bank conditions at the time of an exam. The acronym "CAMEL" refers to the five components of a bank's condition that are assessed: Capital adequacy, Asset quality, Management, Earnings, and Liquidity. A sixth component, a bank's Sensitivity to market risk , was added in 1997; hence the acronym was changed to CAMELS. (Note that the bulk of the academic literature is based on pre-1997 data and is thus based on CAMEL ratings.) Ratings are assigned for each component in addition to the overall rating of a bank's financial condition. The ratings are assigned on a scale from 1 to 5. Banks with ratings of 1 or 2 are considered to present few, if any, supervisory concerns, while banks with ratings of 3, 4, or 5 present moderate to extreme degrees of supervisory concern. In 1994, the RBI established the Board of Financial Supervision (BFS), which operates as a unit of the RBI. The entire supervisory mechanism was realigned to suit the changing needs of a strong and stable financial system. The supervisory jurisdiction of the BFS was slowly extended to the entire financial system barring the capital market institutions and the insurance sector. Its mandate is to strengthen supervision of the financial system by integrating oversight of the activities of financial services firms. The BFS has also established a sub-committee to routinely examine auditing practices, quality, and coverage. In addition to the normal on-site inspections, Reserve Bank of India also conducts offsite surveillance which particularly focuses on the risk profile of the supervised entity. The Off-site Monitoring and Surveillance System (OSMOS) was introduced in 1995 as

an additional tool for supervision of commercial banks. It was introduced with the aim to supplement the on-site inspections. Under off-site system, 12 returns (called DSB returns) are called from the financial institutions, wich focus on supervisory concerns such as capital adequacy, asset quality, large credits and concentrations, connected lending, earnings and risk exposures (viz. currency, liquidity and interest rate risks). In 1995, RBI had set up a working group under the chairmanship of Shri S. Padmanabhan to review the banking supervision system. The Committee certain recommendations and based on such suggestions a rating system for domestic and foreign banks based on the international CAMELS model combining financial management and systems and control elements was introduced for the inspection cycle commencing from July 1998. It recommended that the banks should be rated on a five point scale (A to E) based on the lines of international CAMELS rating model. All exam materials are highly confidential, including the CAMELS. A bank's CAMELS rating is directly known only by the bank's senior management and the appropriate supervisory staff. CAMELS ratings are never released by supervisory agencies, even on a lagged basis. While exam results are confidential, the public may infer such supervisory information on bank conditions based on subsequent bank actions or specific disclosures. Overall, the private supervisory information gathered during a bank exam is not disclosed to the public by supervisors, although studies show that it does filter into the financial markets. CAMELS ratings in the supervisory monitoring of banks Several academic studies have examined whether and to what extent private supervisory information is useful in the supervisory monitoring of banks. With respect to predicting bank failure, Barker and Holdsworth (1993) find evidence that CAMEL ratings are useful, even after controlling for a wide range of publicly available information about the condition and performance of banks. Cole and Gunther (1998) examine a similar question and find that although CAMEL ratings contain useful information, it decays quickly. For the period between 1988 and 1992, they find that a statistical model using

publicly available financial data is a better indicator of bank failure than CAMEL ratings that are more than two quarters old. Hirtle and Lopez (1999) examine the usefulness of past CAMEL ratings in assessing banks' current conditions. They find that, conditional on current public information, the private supervisory information contained in past CAMEL ratings provides further insight into bank current conditions, as summarized by current CAMEL ratings. The authors find that, over the period from 1989 to 1995, the private supervisory information gathered during the last on-site exam remains useful with respect to the current condition of a bank for up to 6 to 12 quarters (or 1.5 to 3 years). The overall conclusion drawn from academic studies is that private supervisory information, as summarized by CAMELS ratings, is clearly useful in the supervisory monitoring of bank conditions.

Industry Overview The banking sector in India is fairly mature in terms of supply, product range andreach. As far as private sector and foreign banks are concerned, the reach in rural Indiastill remains a challenge. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate. Till now, there is hardy any deviation seen from this stated goal which is again very encouraging. With passing time, Indian economy is further expected to grow and be strong for quite some time-especially in its services sector. The demand for banking services, especially retail banking, mortgages and investment services are expected to grow stronger. Therefore, it is not hard to forecast few M&As, takeovers, and asset sales in the sector. Consolidation is going to be another order of the day. The significant change in the policy and attitude that is currently being seen is encouraging for the banking sector growth. In March 2006, the Reserve Bank of India allowed Warburg Pincus, a private foreign investor, to increase its stake in Kotak Mahindra Bank to 10%. Notably, this is the first time that a foreign individual investor has been allowed to hold more than 5% in a private sector bank since 2000. Earlier, The RBI in 2005 announced that any stake exceeding 5% by foreign individual investors in the private sector banks would need to be vetted by them. The following discussion deals with the 6 parameters & 3 major banks in India have been taken for study. The following banks have been taken for the study: Yes Bank Kotak Mahindra Bank ING Vysya Bank

Yes Bank YES BANK, India's new age private sector Bank, is an outcome of the professional entrepreneurship of its Founder, Rana Kapoor and his highly competent top management team, to establish a high quality, customer centric, service driven, private Indian Bank catering to the "Future Businesses of India". YES BANK is the only

Greenfield license awarded by the RBI in the last 15 years, associated with the finest pedigree investors. YES BANK has fructified into a "full service" commercial Bank that has steadily built Corporate and Institutional Banking, Financial Markets, Investment Banking, Corporate Finance, Branch Banking, Business and Transaction Banking, and Wealth Management business lines across the country, and is well equipped to offer a range of products and services to corporate and retail customers. YES BANK has been recognized amongst the Top and the Fastest Growing Bank in various Indian Banking League Tables by prestigious media houses and Global Advisory Firms, and has received national and international honors for our various Businesses including Corporate Finance, Investment Banking, Treasury, Transaction Banking, and Sustainable practices through Responsible Banking. The Bank has received several recognitions for our world-class IT infrastructure, and payments solutions, as well as excellence in Human Capital. They have inducted top quality Human Capital across all our banking functions, including Corporate & Institutional Banking, Financial Markets, Investment Banking, Business & Transactional Banking and Retail Banking & Wealth Management. Kotak Mahindra: Established in 1985, the Kotak Mahindra group has been one of India's most reputed financial conglomerates. In February 2003, Kotak Mahindra Finance Ltd, the group's flagship company was given the license to carry on banking business by the Reserve Bank of India (RBI). This approval created banking history since Kotak Mahindra Finance Ltd. is the first non-banking finance company in India to convert itself in to a bank as Kotak Mahindra Bank Ltd. Today, we are one of the fastest growing bank and among the most admired financial institutions in India. Kotak Mahindra Bank has over 300 branches and a customer account base of over 2.4 million. Spread all over India, not just in the metros but in Tier II cities and rural India as well, we are redefining the reach and power of banking.

ING Vysya Bank ING group originated in 1990 from the merger between Nationale Nederlanden NV the largest Dutch Insurance Company and NMB Post Bank Groep NV. Combining roots and ambitions, the newly formed company called Internationale Nederlanden Group. Market circles soon abbreviated the name to I-N-G. The company followed suit by changing the statutory name to ING Group N.V..ING Vysya Bank Ltd., is an entity formed with the coming together of erstwhile, Vysya Bank Ltd, a premier bank in the Indian Private Sector and a global financial powerhouse, ING of Dutch origin, during Oct 2002. The origin of the erstwhile Vysya Bank was pretty humble. It was in the year 1930 that a team of visionaries came together to form a bank that would extend a helping hand to those who weren't privileged enough to enjoy banking services. It's been a long journey since then and the Bank has grown in size and stature to encompass every area of present-day banking activity and has carved a distinct identity of being India's Premier Private Sector Bank. In 1980, the Bank completed fifty years of service to the nation and post 1985; the Bank made rapid strides to reach the coveted position of being the number one private sector bank. In 1990, the bank completed its Diamond Jubilee year. At the Diamond Jubilee Celebrations, the then Finance Minister Prof. Madhu Dandavate, had termed the performance of the bank Stupendous. The 75th anniversary, the Platinum Jubilee of the bank was celebrated during 2005. The immediate benefit to the bank, ING Vysya Bank, has been the pride of having become a Member of the global financial giant ING. As at the end of the year December 2010, ING's total assets exceeded 1247 billion euros,with a underlying net profit of 3893 million euros, employed around 105000 people, serves over 85 million customers, across 40 countries. This global identity coupled with the back up of a financial power house and the status of being the first Indian International Bank, would also help to enhance productivity, profitability, to result in improved performance of the bank, for the benefit of all the stake holde

Nuts and Bolts of CAMEL framework Capital Adequacy Ratio A Capital Adequacy Ratio is a measure of a bank's capital. It is expressed as a percentage of a bank's risk weighted credit exposures. It is also known as ""Capital to Risk Weighted Assets Ratio (CRAR). Capital adequacy is measured by the ratio of capital to risk-weighted assets (CRAR). A sound capital base strengthens confidence of depositors. This ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world. Asset quality Asset quality determines the robustness of financial institutions against loss of value in the assets. The deteriorating value of assets, being prime source of banking problems, directly pour into other areas, as losses are eventually writtenoff against capital, which ultimately jeopardizes the earning capacity of the institution. With this backdrop, the asset quality is gauged in relation to the level and severity of non-performing assets, adequacy of provisions, recoveries, distribution of assets etc. Popular indicators include non-performing loans to advances, loan default to total advances, and recoveries to loan default ratios. The solvency of financial institutions typically is at risk when their assets become impaired, so it is important to monitor indicators of the quality of their assets in terms of overexposure to specific risks, trends in nonperforming loans, and the health and profitability of bank borrowers especially the corporate sector. Share of bank assets in the aggregate financial sector assets: In most emerging markets, banking sector assets comprise well over 80 per cent of total financial sector assets, whereas these figures are much lower in the developed economies. Furthermore, deposits as a share of total bank liabilities have declined since 1990 in many developed countries, while in developing countries public deposits continue to be dominant in banks. In India, the share of banking assets in total financial sector assets is around 75 per cent, as of end-March 2008. There is, no doubt, merit in recognizing the importance of diversification in the institutional and instrument-specific aspects of financial intermediation in the interests of wider choice, competition and stability. However, the dominant role of banks in financial intermediation in emerging economies and particularly in India will continue in the medium-term; and the banks will continue to be special for a long time. In this regard, it is useful to emphasize the dominance of banks in the developing countries in promoting non-bank financial intermediaries and services including in development of debt-markets. Even where role of banks is apparently diminishing in emerging markets, substantively, they continue to play a leading role in non-banking financing activities, including the development of financial markets. One 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.

NPA: Non-Performing Assets Advances are classified into performing and non-performing advances (NPAs) as per RBI guidelines. NPAs are further classified into sub-standard, doubtful and loss assets based on the criteria stipulated by RBI. An asset, including a leased asset, becomes non-performing when it ceases to generate income for the Bank. An NPA is a loan or an advance where: 1. Interest and/or instalment of principal remains overdue for a period of more than 90 days in respect of a term loan; 2. The account remains "out-of-order'' in respect of an Overdraft or Cash Credit (OD/CC); 3. The bill remains overdue for a period of more than 90 days in case of bills purchased and discounted; 4. A loan granted for short duration crops will be treated as an NPA if the installments of principal or interest thereon remain overdue for two crop seasons; and 5. A loan granted for long duration crops will be treated as an NPA if the installments of principal or interest thereon remain overdue for one crop season. The Bank classifies an account as an NPA only if the interest imposed during any quarter is not fully repaid within 90 days from the end of the relevant quarter. This is a key to the stability of the banking sector. There should be no hesitation in stating that Indian banks have done a remarkable job in containment of non-performing loans (NPL) considering the overhang issues and overall difficult environment. For 2008, the net NPL ratio for the Indian scheduled commercial banks at 2.9 per cent is ample testimony to the impressive efforts being made by our banking system. In fact, recovery management is also linked to the banks interest margins. The cost and recovery management supported by enabling legal framework hold the key to future health and competitiveness of the Indian banks. No doubt, improving recovery-management in India is an area requiring expeditious and effective actions in legal, institutional and judicial processes. Management soundness Management of financial institution is generally evaluated in terms of capital adequacy, asset quality, earnings and profitability, liquidity and risk sensitivity ratings. In addition, performance evaluation includes compliance with set norms, ability to plan and react to changing circumstances, technical competence, leadership and administrative ability. In effect, management rating is just an amalgam of performance in the above-mentioned areas. Sound management is one of the most important factors behind financial institutions performance. Indicators of quality of management, however, are primarily applicable to individual institutions, and cannot be easily aggregated across the sector. Furthermore, given the qualitative nature of management, it is difficult to judge its soundness just by looking at financial accounts of the banks. Nevertheless, total expenditure to total

income and operating expense to total expense helps in gauging the management quality of the banking institutions. Sound management is key to bank performance but is difficult to measure. It is primarily a qualitative factor applicable to individual institutions. Several indicators, however, can jointly serveas, for instance, efficiency measures doas an indicator of management soundness. The 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. Efficiency Ratios demonstrate how efficiently the company uses its assets and how efficiently the company manages its operations. Asset Turnover Ratio = Total Revenue/Total Assets Indicates the relationship between assets and revenue. with high profit margins have low asset turnover - it indicates pricing strategy ey are growing revenue in proportion to sales Asset Turnover Analysis: This ratio is useful to determine the amount of sales that are generated from each dollar of assets. As noted above, companies with low profit margins tend to have high asset turnover, those with high profit margins have low asset turnover.

Earnings and profitability Earnings and profitability, the prime source of increase in capital base, is examined with regards to interest rate policies and adequacy of provisioning. In addition, it also helps to support present and future operations of the institutions. The single best indicator used to gauge earning is the Return on Assets (ROA), which is net income after taxes to total asset ratio. Strong earnings and profitability profile of banks reflects the ability to support present and future operations. More specifically, this determines the capacity to absorb losses, finance its expansion, pay dividends to its shareholders, and build up an adequate level of capital. Being front line of defense against erosion of capital base from losses, the need for high earnings and profitability can hardly be overemphasized. Although different indicators are used to serve the purpose, the best and most widely used indicator is Return on Assets (ROA). However, for in-depth analysis, another indicator Net Interest Margins (NIM) is also used. Chronically unprofitable financial institutions risk insolvency. Compared with most other indicators, trends in profitability can be more difficult to interpret for instance, unusually high profitability can reflect excessive risk taking.

ROA-Return On Assets An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment". The formula for return on assets is: Net Income/ Total Assets ROA tells what earnings were generated from invested capital (assets). ROA for public companies can vary substantially and will be highly dependent on the industry. This is why when using ROA as a comparative measure, it is best to compare it against a company's previous ROA numbers or the ROA of a similar company. The assets of the company are comprised of both debt and equity. Both of these types of financing are used to fund the operations of the company. The ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income. The higher the ROA number, the better, because the company is earning more money on less investment. For example, if one company has a net income of $1 million and total assets of $5 million, its ROA is 20%; however, if another company earns the same amount but has total assets of $10 million, it has an ROA of 10%. Based on this example, the first company is better at converting its investment into profit. When you really think about it, management's most important job is to make wise choices in allocating its resources. Anybody can make a profit by throwing a ton of money at a problem, but very few managers excel at making large profits with little investment.

Liquidity An adequate liquidity position refers to a situation, where institution can obtain sufficient funds, either by increasing liabilities or by converting its assets quickly at a reasonable cost. It is, therefore, generally assessed in terms of overall assets and liability management, as mismatching gives rise to liquidity risk. Efficient fund management refers to a situation where a spread between rate sensitive assets (RSA) and rate sensitive liabilities (RSL) is maintained. The most commonly used tool to evaluate interest rate exposure is the Gap between RSA and RSL, while liquidity is gauged by liquid to total asset ratio. Initially solvent financial institutions may be driven toward closure by poor management of short-term liquidity. Indicators should cover funding sources and capture large maturity mismatches. The term liquidity is used in various ways, all relating to availability of, access to, or convertibility into cash. cash either because it has cash on hand or can otherwise raise or borrow cash. bought or sold in quantity with little impact on market prices.

liquid. The common theme in all three contexts is cash. A corporation is liquid if it has ready access to cash. A market is liquid if participants can easily convert positions into cash or conversely. An asset is liquid if it can easily be converted to cash. The liquidity of an institution depends on: -term need for cash;

how willing will counterparty is to transact trades with or lend to the institution? The liquidity of a market is often measured as the size of its bid-ask spread, but this is an imperfect metric at best. More generally, Kyle (1985) identifies three components of market liquidity: -ask spread; a large trade. Examples of assets that tend to be liquid include foreign exchange; stocks traded in the Stock Exchange or recently issued Treasury bonds. Assets that are often illiquid include limited partnerships, thinly traded bonds or real estate. Cash 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. Credit deposit ratio is a tool used to study the liquidity position of the bank. It is calculated by dividing the cash held in different forms by total deposit. A high ratio shows that there is more amounts of liquid cash with the bank to met its clients cash withdrawals. Sensitivity to market risk It refers to the risk that changes in market conditions could adversely impact earnings and/or capital. Market Risk encompasses exposures associated with changes in interest rates, foreign exchange rates, commodity prices, equity prices, etc. While all of these items are important, the primary risk in most banks is interest rate risk (IRR), which will be the focus of this module. The diversified nature of bank operations makes them vulnerable to various kinds of financial risks. Sensitivity analysis reflects institutions exposure to interest rate risk, foreign exchange volatility and equity price risks (these risks are summed in market risk). Risk sensitivity is mostly evaluated in terms of managements ability to monitor and control market risk. Banks are increasingly involved in diversified operations, all of which are subject to market risk, particularly in the setting of interest rates and the carrying out of foreign exchange transactions. In countries that allow banks to make trades in stock markets or

commodity exchanges, there is also a need to monitor indicators of equity and commodity price risk. Interest Rate Risk Basics In the most simplistic terms, interest rate risk is a balancing act. Banks are trying to balance the quantity of re-pricing assets with the quantity of re-pricing liabilities. For example, when a bank has more liabilities re-pricing in a rising rate environment than assets re-pricing, the net interest margin (NIM) shrinks. Conversely, if your bank is asset sensitive in a rising interest rate environment, your NIM will improve because you have more assets re-pricing at higher rates. An extreme example of a re-pricing imbalance would be funding 30-year fixed rate mortgages with 6-month CDs. You can see that in a rising rate environment the impact on the NIM could be devastating as the liabilities re-price at higher rates but the assets do not. Because of this exposure, banks are required to monitor and control IRR and to maintain a reasonably well-balanced position. Liquidity risk is financial risk due to uncertain liquidity. An institution might lose liquidity if its credit rating falls, it experiences sudden unexpected cash outflows, or some other event causes counterparties to avoid trading with or lending to the institution. A firm is also exposed to liquidity risk if markets on which it depends are subject to loss of liquidity. Liquidity risk tends to compound other risks. If a trading organization has a position in an illiquid asset, its limited ability to liquidate that position at short notice will compound its market risk. Suppose a firm has offsetting cash flows with two different counterparties on a given day. If the counterparty that owes it a payment defaults, the firm will have to raise cash from other sources to make its payment. Should it be unable to do so, it too we default. Here, liquidity risk is compounding credit risk. Accordingly, liquidity risk has to be managed in addition to market, credit and other risks. Because of its tendency to compound other risks, it is difficult or impossible to isolate liquidity risk. In all but the most simple of circumstances, comprehensive metrics of liquidity risk don't exist. Certain techniques of asset liability management can be applied to assessing liquidity risk. If an organization's cash flows are largely contingent, liquidity risk may be assessed using some form of scenario analysis. Construct multiple scenarios for market movements and defaults over a given period of time. Assess dayto-day cash flows under each scenario. Because balance sheets differed so significantly from one organization to the next, there is little standardization in how such analyses are implemented. Regulators are primarily concerned about systemic implications of liquidity risk. Business activities entail a variety of risks. For convenience, we distinguish between different categories of risk: market risk, credit risk, liquidity risk, etc. Although such categorization is convenient, it is only informal. Usage and definitions vary. Boundaries between categories are blurred. A loss due to widening credit spreads

may reasonably be called a market loss or a credit loss, so market risk and credit risk overlap. Liquidity risk compounds other risks, such as market risk and credit risk. It cannot be divorced from the risks it compounds. ANALYSIS AND INTERPRETATION Now each parameter will be taken separately & discussed in detail. (A)CAPITAL ADEQUACY: Capital adequacy ratio is defined as

where Risk can either be weighted assets ( ) or the respective national regulator's minimum total capital requirement. If using risk weighted assets,

8%. The percent threshold (8% in this case, a common requirement for regulators conforming to the Basel Accords) is set by the national banking regulator. Two types of capital are measured: tier one capital, which can absorb losses without a bank being required to cease trading, and tier two capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors. THE CAPITAL ADEQUACY RATIO FOR 3 MAJOR BANKS IN INDIA Particulars Yes Bank Kotak Mahindra 2006 16.43% 11.66% 2007 13.60% 12.16% 2008 13.60% 11.40% 2009 16.60% 13.08% 2010 20.60% 13.73%

ING Vysya Table No.1

11.21%

12.66%

11.08%

11.57%

13.99%

CAR25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 2006 2007 2008 2009 2010 YES BANK KOTAK MAHINDRA ING VYSYA

Graph No.1 INTERPRETATIONS:Reserve Bank of India prescribes Banks to maintain a minimum Capital to risk-weighted Assets Ratio (CRAR) of 9 percent with regard to credit risk, market risk and operational risk on an ongoing basis, as against 8 percent prescribed in Basel Documents. Capital adequacy ratio of the Yes Bank was well above the industry average of 13.97%. All the banks have maintained good CAR. Higher the ratio the banks are in a comfortable position to absorb losses but too high are not good. YES Banks CAR is very high which not a good sign for the bank is .

(B)ASSET QUALITY: TABLES SHOWING THE NPA OF 3 MAJOR BANKS IN INDIA Gross NPA Particulars Yes Bank Kotak Mahindra ING Vysya Table No.2 .83% 1.14% 1.69% 1.99% 2.93% March,06 1.43% 3.01% March,07 1.40% 1.95% March,08 1.45% 1.14% March,09 1.72% 2.87% March,10 1.89% 4.69%

GROSS NPA5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% March,06 March,07 March,08 March,09 March,10 YES BANK KOTAK MAHINDRA ING VYSYA

Graph No.2

Net NPA Particulars Yes Bank Kotak Mahindra ING Vysya Table No.3 .42% .72% .99% 1.39% 1.20% March, 06 1.39% .47% March, 07 .94% .43% March, 08 .67% .44% March, 09 1.56% .24% March, 10 2.19% .16%

NET NPA2.50% 2.00% 1.50% 1.00% 0.50% 0.00% March, 06 March, 07 March, 08 March, 09 March, 10 YES BANK KOTAK MAHINDRA ING VYSYA

Graph No.3 INTERPRETATIONS: Above ratios show the highest NPA of Yes bank from the last 5 years among the 3 banks. Kotak Mahindra Banks asset quality is the best in the Indian banking sector despite the bank sustaining aggressive growth for the past several quarters. The bank has maintained its net NPAs at 0.16% as at end FY10. It has continued to make general

provisions and holds specific general provisions on its standard customer assets that are higher than regulatory requirements. ING VYSYA is also approaching to good level.

( C )MANAGEMENT SOUNDNESS Asset Turnover Ratio Particulars Yes Bank Kotak Mahindra ING Vysya Table No.4 3.56% 3.01% 4.00% 4.97% 6.32% 2006 7.83% 2.80% 2007 8.50% 2.89% 2008 11.96% 3.50% 2009 12.44% 4.33% 2010 13.93% 5.18%

ASSET TURNOVER RATIO16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 2006 2007 2008 2009 2010 YES BANK KOTAK MAHINDRA ING VYSYA

Graph No.4

INTERPRETATION: Asset turnover measures a firm's efficiency at using its assets in generating sales or revenue - the higher the number the better. From the above information,it is clear that the asset turnover ratio of Yes bank is increasing every year and highest comparing with the Kotak Mahindra Bank and ING VYSYA bank in the period of study.It shows the banks efficiency in using its assets to generate high revenue .

(D) EARNINGS & PROFITABILITY The ratio that is used for the profitability for the 3 banks are as follows:

ROA-Return On Assets Particulars Yes Bank Kotak Mahindra ING Vysya Table No.5 1.27% 1.08% 1.11% 1.06% 1.16% 2006 1.33% 1.40% 2007 1.17% 1.42% 2008 1.05% 1.41% 2009 0.78% 1.40% 2010 0.71% 1.42%

ROA1.60% 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% 2006 2007 2008 2009 2010 YES BANK KOTAK MAHINDRA ING VYSYA

Graph No.5 INTERPRETATIONS: Kotak Mahindra Bank has highest ROA and ING VYSYA is also growing year by year but Yes Bank is facing a negative growth year by year.

(E) LIQUIDITY: Credit Deposit Ratio Banks Yes Bank Kotak Mahindra ING Vysya Table No.6 43.63% 47.40% 52.79% 59.85% 65.94% 2006 88.66% 55.89% 2007 78.13% 64.87% 2008 73.14% 65.79% 2009 74.16% 66.08% 2010 80.52% 65.28%

CREDIT DEPOSIT RATIO100.00% 90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 2006 2007 2008 2009 2010 YES BANK KOTAK MAHINDRA ING VYSYA

Graph No.6 INTERPRETATIONS: Credit deposit ratio is a tool used to study the liquidity position of the bank. A high ratio shows that there is more amounts of liquid cash with the bank to met its clients cash withdrawals. From the above table, Yes bank has maintained high ratio during the period of study. But the ING Vysya Bank has maintained a least ratio during all years of study but it has a positive growth. Kotak Mahindra Bank has maintained the cdr ratio lower than Yes bank but higher than ING Vysya bank. Recommendations:

The system is getting internationally standardized with the coming of BASELL II accords so the Indian banks should strengthen internal processes so as to cope with the standards. The banks should try to maintain a 0% NPA by always lending and investing or creating quality assets which earn returns by way of interest and profits. Corporation bank is performing well in Management, earnings and Liquidity but lacking in Capital and Assets Management.

The Bank should focus more on managing Asset as it is at t he last p o s i t i o n compared to other banks. Even in Capital Management, Kotak Mahindra Bank is having almost 22% capital adequacy ratio whereas corporation bank is having 13.66% which is lowest of all banks mentioned in the report.

CONCLUSION The current Banking Crisis, which is quite unprecedented, underlines the importance of regulatory issues and the effects of incompetence in this area. CAMEL, as a rating system for judging the soundness of Banks is a quite useful tool that can help in mitigating the conditions and risks that lead to Bank failures. The report makes an attempt to examine and compare the performance of four different banks of India i.e. Corporation Bank, Kotak Mahindra Bank, ING Vysya Bank and YES Bank. The analysis is based on the CAMEL Model. The study has brought many interesting results, some of which are mentioned as below: The current Banking Crisis, which is quite unprecedented, underlines the importance of regulatory issues and the effects of incompetence in this area. CAMEL, as a rating system for judging the soundness of Banks is a quite useful tool, which can help in mitigating the conditions and risks that lead to Bank failures. The report makes an attempt to examine and compare the performance of four different banks of India i.e. Corporation Bank, Kotak Mahindra Bank, ING Vysya Bank and Yes Bank. The analysis is based on the CAMEL Model. The study has brought many interesting results, some of which are mentioned as below: All the three banks have succeded in maintaining CRAR at a higher level than the prescribed level, 9%. But KOTAK MAHINDRA BANK has maintained highest estimate i.e. 19.86%. It is very good sign for the bank to survive and to expand in future. In Management Quality, we have found that Business per Employee Ratio and Profit per Employee Ratio is more in ING Vyasya Bank and Yes Bank. This shows the growth of the bank as well as efficiency of the employee, which is very good in both the banks and they will help to the bank to grow in future. After evaluating all the ratios, calculations and ratings we have given are as follows: 1stRank: K o t a k M a h i n d r a B a n k 2nd Rank: ING Vyasya Bank 3 r d R a n k : Yes Bank