A CAMEL MODEL ANALYSIS OF PRIVATE BANKS IN INDIA

Abstract

Performance evaluation of the banking sector is an effective measure and indicator to check the soundness of economic activities of an economy. In the present study, an attempt has been made to evaluate the performance & financial soundness of selected Private Banks in India for the period 2007-2017. CAMEL approach has been used to examine the financial strength of the selected banks. Composite Rankings, Average, and Covariance has been applied here to reach conclusion through the comparative and significant analysis of different parameters of CAMEL. Axis bank is ranked first under the CAMEL analysis followed by ICICI bank. Kotak Mahindra occupied the third position. The fourth position is occupied by HDFC bank and the last position is occupied by IndusInd bank amongst all the selected banks.

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UGC-Approved Journal No: 47335
ACAMELMODELANALYSISOF
PRIVATEBANKSIN INDIA
Vinod Kumar11Research Scholar, Department of commerce, Kurukshetra University,
Kurukshetra, Haryana, India
Bhawna Malhotra2
2Research Scholar, Department of commerce, Kurukshetra University,
Kurukshetra, Haryana, India
ABSTRACT
Performance evaluation of the banking sector is an effective measure and indicator to
check the soundness of economic activities of an economy. In the present study an
attempt has been made to evaluate the performance & financial soundness of selected Private Banks
in India for the period 2007-2017. CAMEL approach has been used to examine the financial strength
of the selected banks. Composite Rankings, Average, and Covariance has been applied here to reach
conclusion through the comparative and significant analysis of different parameters of CAMEL.
Axis bank is ranked first under the CAMEL analysis followed by ICICI bank. Kotak Mahindra
occupied the third position. The fourth position is occupied by HDFC bank and the last position is
occupied by IndusInd bank amongst all the selected banks.
KEYWORDS: Private Banks, Financial Performance, CAMEL Model.
INTRODUCTION
Banking sector is an important component of
financial system plays a key role in the economic
development of countries and it helps in stimulation of
Capital formation, innovation and monetization in
addition to facilitation of monetary policy (Said & Tumin,
2011). Indian banking industry has undergone several
changes during the liberalization process. Indian
banking sector has been dominated by public sector
banks since 1969 when all major banks were nationalised
by the Indian government. However, after liberalisation
in government banking policy in the 1990s old and new
private sector banks have grown faster and bigger over
the last two decades by using the latest technology,
providing contemporary innovations and monetary
tools and techniques. The Ind ian banking system
emerged unhurt from theglobal financial crisisof 2008,
but the subsequenteconomic slowdown(barring 2009-
10) has exerted pressure on banks’ profitability and
capital. Private sector banks have seen improvement in
asset quality and efficiency parameters, whereas public
sector banks have seen declines in both areas (Baru,
20 10). Sound finan cia l hea lth and pe rfo rmance
evaluation of a bank is significant for the depositors,
shareholders, employees and the whole economy of a
country becauseit determines banks’ capabilities to
compete in the sector and has a critical role for the
development of the sector. As a result to this statement,
efforts have been made from time to time, to measure
the financial position of each bank and manage it
efficiently and effectively (Mohiuddin, 2014). It is of
great importance to evaluate the overall performance of
banks by implementing a regulatory banking supervision
framework. One of such measures of supervisory
information is the CAMEL rating system which was put

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into effect firstly in the U.S. in 1979, and now it has been
proved to be a useful and efficient tool in response to
the financial crisis in 2008 by the U.S. government (Dang,
2011).
This study is organized as follows: the next
section following the introduction discusses the relevant
literature. The third section defines the Objective and
Methodology of the study. In fourth section results and
analysis are described, and the final section presents
the main conclusions and suggestions.
LITERATURE REVIEW
Mathuva (2009) examined the relationship between
Cost Income Ratio (CIR), Capital Adequacy Ratio (CAR)
and profitability for the period 1998 to 2007. The study
found that capital adequacy had differential impact on
the profitability of the bank. Mishra et al (2012)
analyzed the performance of 12 public and private sector
banks for the period 2000-2011 by using CAMEL
approach. It was concluded that private sector banks
were growing at faster pace as compared to public sector
banks. Union bank and SBI had displayed low economic
soundness. Misra(2013) assessed the performance
and financial soundness of State Bank Group using
CAMEL approach. The study concluded that there is a
requirement to improve its position in respect to asset
quality and capital adequacy. Erol (2013) compared
the performance of Islamic banks against conventional
banks in Turkey during the period of 2001-2009. The
results showed that Islamic banks performed better in
profitability and asset management ratios compared to
conventional banks but slow in sensitivity to market
risk criterion. Rostami (2015) analyzed the impact of
each parameter of CAMELS model on the performance
of Ir a nian banks . Q-Tobi n’s ra t io was used as
performance indicator in this study. It was found that
there was significant relation between each category of
camel model and Q-Tobin’s ratio as bank’s performance
ratio. Majumdar (2016) measured the financial
performance of 15 banks in Bangladesh for the period
2009-2013. CAMEL model had been used to examine the
financial soundness of selected banks. Composite
Ranking, average and ANOVA test had been applied to
the data. The study concluded that there had been
significant difference in the performance of selected
banks. The study suggested that banks should take
required steps to recover their shortcomings. Ramya
(2017) analyse the financial performance of State Bank
of India for the study period 2012-2016 through the use
of CAMEL approach. It was concluded that there is a
need to take necessary steps to improve the position of
SBI in the context of few parameters i.e., debt-equity,
operating profit, and non-interest income to total income.
Sin gh (201 7 ) e x ami n ed the capit a l a dequa c y
performance of private and public sector banks in India
for a period of 2006-2015. The study found that all the
banks had sound capital adequacy position except
Central Bank of India.
OBJECTIVE & RESEARCH
METHODOLOGY
The main purpose of this paper is an attempt
to compare the performance of selected Private Banks
and to investigate the factors that mainly affects the
financial performance of the selected banks in India.
The present study is Descriptive cum exploratory in
nature as it try to obtain information concerning the
current status of the phenomena and to describe “what
exists” with respect to variables. Top five private sector
banks i.e. HDFC Bank, ICICI Bank, Kotak Mahindra,
Axis Bank, Indus Ind Bank; as per their mar ket
capitalization are selected from the listed banks on BSE.
This study is purely based on secondary data which is
collected fro m annual reports of selected banks,
Capitaline data base and Reserve Bank of India, for the
time period of Ten years i.e. from year 2006-07 to year
2016-17. CAMEL approach has been used to examine
the financial strength of the selected banks. Certain
ratios have been calculated under each acronym of
CAM EL and Compo si te Rankings, Average , and
Covariance are applied here to reach conclusion through
the comparative and significant analysis of different
parameters of CAMEL.
RESULTS AND ANALYSIS
In this section we will analyse the financial
soundness of the selected banks based on the CAMEL
framework. Only those indicators are selected which
are appropriate for the study. The selection of
indicators is based on their analytical significance,
availability of data for compilation, calculation and its
relevance for the study. The following table shows the
selected indicators for the study under each acronym
of CAMEL:-

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Table1: Calculated ratio under CAMELmodel
Capital Adequacy
AssetsQuality
Managerial
Efficiency
Earning
Capabilities
Liquidity
Capital Adequacy
Ratio
Capital Adequacy
Ratio tier 1
Capital Adequacy
Ratio tier 2
Net NPA to Net
Advance
Secured Advance
to total Advance
Term loans to
Total Advance
Return on
Equity(ROE)
Business Per
Employee
Profit per
Employee
Return on Net
Worth
Return on Assets
Net Interest
Margin
Operating Profit to
Total Assets
Non-Interest
Income tototal
assets
Cash Deposit Ratio
Credit Deposit
Ratio
Investment
Deposit Ratio
1. CAPITAL ADEQUACY
Capital Adequacy indicates whether the bank
has enough capital to absorb unexpected losses. It is
requ ired to mainta in dep ositors’ confid ence and
preventing the bank from going bankrupt (Reddy, 2012).
“Meeting statutory minimum capital requirement is the
key fact or in dec id ing the capital adequacy, and
maintaining an adequate level of capital is a critical
elem ent” (The Unit ed States Unif orm Finan cia l
Institutions Rating System 1997) it shows the ability of
the firm that liability could be privileged. If there is any
loss of loans it will be a great risk for banks to meet the
demand of their depositors. Therefore, to prevent the
bank from failure, it is necessary to maintain a significant
level of capital adequacy (Chen, 2003). As per regulatory
norms, Indian scheduled commercial banks are required
to maintain a CAR of 9% while Indian public sector
banks are emphasized to maintain a CAR of 12%.
Table 2: Capital Adequacy of selected banks
Parameters
HDFC
ICICI
Kotak
Mahindra
Axis Bank
IndusInd
Bank
Capital
Adequacy
Ratio
Mean
15.77
16.88
17.63
14.46
13.89
St. Dev.
1.33
2.40
1.89
1.59
1.47
C. V.
1.78
5.77
3.57
2.53
2.16
RANK
3
2
1
4
5
Tier 1
Capital
Mean
11.63
12.23
15.25
10.53
10.76
St. Dev.
1.49
1.71
2.41
1.87
2.69
C. V.
2.22
2.93
5.82
3.50
7.22
RANK
3
2
1
5
4
Tier 2
Capital
Mean
4.15
4.65
2.38
3.92
3.12
St. Dev.
0.96
1.23
1.34
0.77
1.92
C. V.
0.93
1.52
1.80
0.60
3.69
RANK
2
1
5
3
4
Composite
Average
2.66
1.67
1.4
4
4.33
Rank
3
2
1
4
5
Source: Compiled from annual reports of respective bank
The above table shows that in term of overall
Capital Adequacy Kotak Mahindra has top position
followed by ICICI, HDFC and Axis bank. The lowest
composite rank represents the good position for the
bank. On the other hand, IndusInd bank has the lowest
position in comparison to other banks under the study.
Capital adequacy highest in case of Kotak Mahindra
bank which is 17.63 and IndusInd bank has 13.89. ICICI
has suffered from highest slandered deviation which
shows more volatility as compare to other bank.
2. ASSET QUALITY
The quality of assets is an important parameter
to examine the degree of financial strength. The
primary objective to measure the assets quality is to
ascertain the composition of non-performing assets
(NPAs) as a percentage of the total assets.
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Table 3: Asset Quality of selected banks
Parameters
HDFC
ICICI
Kotak
Mahindra
Axis Bank
IndusInd
Bank
Net NPA to
Net
Advance
Mean
0.32
1.50
1.29
0.45
0.82
St. Dev.
0.14
0.69
0.60
0.15
0.81
C. V.
0.02
0.47
0.36
0.02
0.66
RANK
1
5
4
2
3
Secured
Advance to
total
Advance
Mean
74.95
80.86
78.85
83.16
89.56
St. Dev.
2.47
4.65
4.66
3.17
2.46
C. V.
6.12
21.65
21.68
10.03
6.05
RANK
5
3
4
2
1
Term loans
to Total
Advance
Mean
66.47
80.96
78.32
70.21
67.72
St. Dev.
8.05
2.62
7.38
1.25
5.61
C. V.
64.77
6.85
54.50
1.55
31.52
RANK
5
1
2
3
4
Composite
Average
3.67
3
3.33
2.33
2.67
Rank
5
3
4
1
2
Source: Compiled from annual reports of respective banks
From the Table No. 3, it is witnessed that assets
quality of Axis bank is much better as compare to other
bank. IndusInd bank got second place in assets quality
foll owed by ICICI , Kotak Mahindra and HDFC
respectively. Net NPA to Net Advance ratio (Lowest
value provide lowest rank) shows that HDFC (0.32) has
the better condition with standard deviation 0.14. Where
Secured Advance to total Advance depicts that highest
value 89.56 obtain by the IndusInd bank and standard
deviation value is 2.46. Term loans to Total Advance
showed that ICICI have highest value (66.47) with
standard deviation 8.05) which is more volatile in
comparison to other.
3. MANAGMENT EFFICIENCY
Ma nag e me nt effici enc y is anothe r vita l
component of the CAMEL model that ensures the
survival and growth of a bank. While the other factors
of CAMEL model can be quantified easily from current
financial statements, management quality is a somewhat
indefinable and subjective measure, yet one that is
crucial for institutional success. The banking sector
reforms reinforce the need to improve productivity of
the banks through appropriate measures which aim at
re ducing the operating cos t and impro ving the
profitability of the banks.
Table 4: Managerial Efficiency of selected banks
Parameters
HDFC
ICICI
Kotak
Mahindra
Axis Bank
IndusInd
Bank
Return on
Equity
Mean
18.53
11.45
12.66
18.70
14.50
St. Dev.
1.52
2.25
2.34
1.26
4.55
C. V.
2.31
5.07
5.47
1.58
20.74
RANK
2
5
4
1
3
Business
Per
Employee
Mean
72.45
69.09
55.70
122.54
84.50
St. Dev.
21.18
36.80
14.26
14.26
11.28
C. V.
448.64
1354.48
203.33
203.29
127.32
RANK
3
4
5
1
2
Profit per
Employee
Mean
0.84
18.63
0.72
1.31
0.70
St. Dev.
0.32
35.15
0.28
0.33
0.28
C. V.
0.10
1235.39
0.08
0.11
0.08
RANK
3
1
4
2
5
Return on
Net Worth
Mean
18.49
11.51
12.68
18.71
15.80
St. Dev.
1.57
2.26
2.33
1.27
4.33
C. V.
2.48
5.13
5.41
1.61
18.74
RANK
2
5
4
1
3
Composite
Average
2.5
3.75
4.25
1.25
3.25
Rank
2
4
5
1
3
Source: Compiled from annual reports of respective bank

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Table no 4 depicts that managerial efficiency
of Axis bank is better in comparison to other banks
followed by HDFC, IndusInd bank and ICICI banks
respectively and Kotak Mahindra got lowest rank.
Return on Equity and business per employee analysis
shows that the Axis banks have highest value with mean
18.70 and 122.54 respectively. ICICI bank has highest
Profit per Employee mean value i.e. 18.63 and standard
deviation 35.15. Axis bank shows better position in terms
of Return on Net Worth with mean and standard
deviation 18.71 and 1.27 respectively.
4. EARNING QUALITY
The quality of earnings is crucial criterion that
determines the ability of a bank to earn consistently.
Basically, it determines the profitability of bank and
explains its sustainability and growth in earnings in
future context. Banks depend on their strong earning
capability to perform the activities such as funding
dividends, maintaining adequate capital levels, providing
for investment opportunities to for bank for growth,
strategies for engaging in new activities and maintaining
the competitive outlook
Table 5: Earning Quality of selected banks
Parameters
HDFC
ICICI
Kotak
Mahindra
Axis Bank
IndusInd
Bank
Return on
Assets
Mean
1.67
1.40
1.52
1.58
1.27
St. Dev.
0.28
0.30
0.38
0.23
0.60
C. V.
0.08
0.09
0.14
0.05
0.36
RANK
1
4
3
2
5
Net
Interest
Margin
Mean
4.29
2.47
4.68
3.04
2.81
St. Dev.
0.20
0.43
0.48
0.29
0.88
C. V.
0.04
0.18
0.23
0.08
0.77
RANK
2
5
1
3
4
Operating
Profit to
Total
Assets
Mean
3.19
2.59
2.85
2.90
2.32
St. Dev.
0.09
0.46
0.48
0.36
0.88
C. V.
0.01
0.21
0.23
0.13
0.78
RANK
1
4
3
2
5
Non-
Interest
Income to
total assets
Mean
1.85
1.97
1.74
2.05
1.95
St. Dev.
0.14
0.25
0.31
0.20
0.44
C. V.
0.02
0.06
0.10
0.04
0.19
RANK
4
2
5
1
3
Composite
Average
2
3.75
3
2
4.25
Rank
1.5
4
3
1.5
5
Source: Compiled from annual reports of respective banks
Table 5 depicts that HDFC and Axis bank has
top position in term of earning quality followed by Kotak
Mahindra and ICICI bank and lowest position secured
by IndusInd bank. Return on Assets is highest in case
of HDFC bank with mean value 1.67 and lowest in
IndusInd bank with mean value 1.27. Kotak Mahindra
has highest net interest margin and ICICI has lowest
with mean 4.68 and 2.47 respectively. Operating Profit
to Total Assets shows that HDFC has the highest
position and Axis bank got the highest position in term
of Non-Interest Income to total assets with mean value
3.19 and 2.05 respectively.
5. LIQUIDITY
Liquidity has a significant impact on financial
soundness and it evaluates the operational performance
of a bank. It indicates the capacity of a bank to pay its
short term debts and face unexpected withdrawals of
dep o sito r s . L iquid i ty shows t h e a b ilit y o f a n
organisation to convert its assets into cash without any
loss. Liquidity of the banks assures the depositors that
they can access to their funds whenever need arise and
shows the stability and longevity of banks. While too
much liquidity has a negative impact on profitability,
too little liquidity increases the risk of insolvency.
Vi nod Kumar & Bhaw na Malh otr a

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Table 6: Liquidity Quality of selected banks
Parameters
HDFC
ICICI
Kotak
Mahindra
Axis Bank
IndusInd
Bank
Cash
Deposit
Ratio
Mean
8.02
8.57
6.42
6.75
6.47
St. Dev.
2.54
2.32
1.79
1.06
1.05
C. V.
6.43
5.37
3.21
1.13
1.11
RANK
2
1
5
3
4
Credit
Deposit
Ratio
Mean
76.15
97.39
94.76
76.82
79.80
St. Dev.
6.74
6.38
6.62
8.90
10.40
C. V.
45.37
40.74
43.78
79.17
108.26
RANK
5
1
2
4
3
Investment
Deposit
Ratio
Mean
37.77
50.81
51.81
39.97
35.39
St. Dev.
5.59
8.61
8.55
3.44
2.46
C. V.
31.28
74.14
73.14
11.82
6.04
RANK
4
2
1
3
5
Composite
Average
3.67
1.33
2.67
3.33
4
Rank
4
1
2
3
5
Source: Compiled from annual reports of respective banks
Above table present that liquidity position of
ICICI bank is much better followed by Kotak Mahindra,
Axis bank, and HDFC respectively. IndusInd bank
secured the lowest position in term of liquidity. ICICI
Bank has strong position in case of in case of cash
deposit ratio and credit deposit ratio. Kotak Mahindra
has highest average investment deposit ratio i.e. 51.81
with standard deviation 8.55.
OVERALL RANKING
The overall ranking of the banks considering
all the sub criteria rankings under CAMEL analysis
over the ten years period (2007-2017) is presented in
following Table 1-6. The group rankings of all the banks
considered for the purpose of study is taken and
averaged out to reach at the overall grand ranking. Axis
bank is ranked first under the CAMEL analysis followed
by ICICI. Kotak Mahindra occupied the third position.
The fourth position is occupied by HDFC. The last
position under CAMEL analysis is occupied by
IndusInd bank amongst all the selected banks during
the year 2007-2017.
Table 8: Overall ranking of the selected banks based on the CAMELS parameters
Bank
Capital
Adequacy
Assets
quality
Managerial
efficiency
Earning
capacity
Liquidity
AVERAGE
Rank
HDFC
3
5
2
1.5
4
3.1
4
ICICI
2
3
4
4
1
2.8
2
Kotak
Mahindra
1
4
5
3
2
3
3
Axis
Bank
4
1
1
1.5
3
2.1
1
IndusInd
Bank
5
2
3
5
5
4
5
CONCLUSION AND SUGGESTION
By consider ing all of the parameter s of
CAMEL, it is seen that Axis bank is at the top position
as assessed by the CAMEL Model compared to other
ban ks under t he stud y. Axis bank h as stron g
performance in case of Asset Quality, Management
efficiency and Earnings Ability while it is lag behind in
case of capital adequacy. On the other side, IndusInd
bank at the lowest position compared to other banks
under the study due to its poor performance in the
context of Capital Adequacy, Earnings Ability and
Liquidity whereas it perform better in case of capital
adequacy. Therefore, IndusInd bank should improve its
position in particular weak areas. Therefore, the policy
makers of the related lowest ranking banks should take
necessary steps and try to find out solution to improve
their weaknesses by using the findings this study.

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