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CAMELS
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 off-site 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 suggetions 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 th elines of international CAMELS rating model. CAMELS evaluates
banks on the following six parameters :-
(a) Capital Adequacy :Capital adequacy is measured by the ratio of capital to
risk-weighted assets (CRAR). A sound capital base strengthens confidence of
depositors
(b) Asset Quality : 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.
(c) Management : 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.
(d) Earnings : It can be measured as the the return on asset ratio.
(e) Liquidity : 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.
(f) Systems and Control
Each of the above six parameters are weighted on a scale of 1 to 100 and
contains number of sub-parameters with individual weightages.
Rating
Rating symbol indicates
Symbol
A Bank is sound in every respect
B Bank is fundamentally sound but with moderate weaknesses
financial, operational or compliance weaknesses that give cause for
C
supervisory concern.
serious or immoderate finance, operational and managerial weaknesses
D
that could impair future viability
critical financial weaknesses and there is high possibililty of failure in the
E
near future.
It's about practice warts and all - and the warts are more
interesting than the practice sometimes'
The CAMEL model is based on the Uruguayan farmers' model. Participants who have
an interest (passion even) for a particular topic and who wish to learn more by
sharing knowledge, practices and ideas agree to hold a series of study visits. They
take it in turn to organise and host a visit to their organisation. The event consists
of:
• Presentations by managers, practitioners and partners outlining strategies
and practice
• Discussions around the presentations, as follow-up to inter-visit
communications, generally on key themes and suggestions and ideas for
future practice
• Demonstrations of tools or systems
• Hands-on sessions to enable actual experience
• Review and evaluation of the practices discussed, the day itself and
suggestions for themes of future visits and inter-visit communication
The visits give the host the opportunity to showcase their practice as part of the
sharing process as well as allowing for discussions and suggestions for change.
Honesty is crucial to see 'the warts and all'.
In order to agree on topics of interest and a schedule of visits, it is helpful to hold a
start-up meeting on neutral ground. This allows participants to get to know each
other before the study visits. It is at this meeting that the ground rules are agreed
and the decision is made as to whether to engage an external reviewer. If funding
has been obtained for the project, then it is likely that independent, external
evaluation of the project is required.
As project management and facilitation is key to the success of the project, it may
be useful to have third party involvement. In the pilot, JISC infoNet and the
Association for Learning Technology (ALT) took responsibility for managing the
project. More detail on this aspect can be found in a separate section 'Managing the
Project'.
Figure 1 shows a diagrammatic representation of the model. This model is based on
a group that includes institutions and sector-wide organisations.
