Neel Camel Rating

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CAMEL RATING

BY: NILAM PATEL



RATING SYSTEM



C AMEL Background

The CAMEL methodology was originallyadopted by North American bank regulators

to evaluate the financial and managerialsoundness of U.S. commercial lendinginstitutions and also by National Credit UnionAdministration (NCUA) in October 1987

Credit Unions , datedDecember 1994



C AMEL RATING

An international bank-rating system with which

bank supervisory authorities rate institutionsaccording to certain factors. The areas examinedare represented by the "CAMEL."



THERE ARE SIX ELEMENTS

C AMEL :

C APITAL ADEQUA C YASSET QUALITYMANAGEMENTEARNINGSLIQUIDITY

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Purpose of C AMEL ratings

F inancial

Operational

Managerial



Revision of C AMEL Rating System

Sensitivity to Market Risk

J anuary 1, 1997.



RATINGP ROVISIONS

´ Rating 1 indicates strong performance: BEST rating.´ Rating 2 reflects satisfactory performance.´Rating 3 represents performance that is flawed to somedegree.

´ Rating 4 refers to marginal performance and issignificantly below average and´ Rating 5 is considered unsatisfactory: W ORST rating.



C apital Adequacy

- C apital Adequacy- Debt-Equity Ratio- Advances to Assets- G-Secs to Total Investments

Rating factorsC apital is rated based on the followingconsiderations:

Asset and capital growthEarnings performance and distribution of dividendsAccess to capital markets



C apital rating 1

Rating ´1µ is characterized by:

Capital levels and ratios exceed all regulatory requirements

Strong earnings performanceWell managed and controlled growthReasonable dividends



C apital rating 2

Rating ´2µ is characterized by similar criteria as´1µ, but experiences weaknesses is one or moreof the factors.

Capital and solvency ratios exceed regulatoryrequirements, but :Problem assets relatively high.



C apital rating 3

Ratingµ3µindicates that the bank complies with capitaladequacy and solvency regulatory requirements, but hasmajor weaknesses in in one or more factors:

Problem assets in excess of 25% of total capitalBank fails to comply with regulatory regulationsPoor earningsInability to raise new capital



C apital rating 4

Rating ´4µ means that the bank is experiencingsevere problems resulting in inadequate capital tosupport risks associated with the business andoperations:

Problem loans in excess of 50% of total capital.



C apital rating 5

Ratingµ5µ indicates that the bank is insolvent.



Asset Quality

Asset represents all the assets of the bank, current andfixed, loan portfolio, investments and real estate

- Net NPAs to Net Advances- Total Investments to Total Assets- Percentage change in Net NPAs- Net NPAs to Total Assets



Rating factors

Asset quality is based on the followingconsiderations:

Volume of problem assetsVolume of overdue loansAbility of management to administer all the assets of

the bank and to collect problem loansLoan portfolioM I S



Asset quality rating 1

Asset quality rating ´1µ is characterized by:Ratio of troubled assets to capital is less than 2% or3%

Efficient loan portfolio managementAdequate Loan Loss Reserves in accordance with CBI·sregulations




Asset quality rating ´2µ is assigned to banks that areexperiencing non significant weaknesses, and themanagement is able to address these issues withoutclose regulatory oversight.

Problem assets do not exceed 10 % of total capital, but:The bank isexperiencing negative trends in the level of overdue and prolongedcredits.




Regulatory oversight is required to ensure thatmanagement is able to address the problems. Othercharacteristics are:

Poor underwriting standardsPolicies and procedures are not properly implemented

Bank is experiencing high level of past due and rescheduledcredits




Asset quality rating ´4µ indicates a bank with severeproblems resulting in inadequate capital to support risksassociated with the bank business and operations.

High volume of loss m aking lo an s .Level of pr oblem cr ed it s continues to increase and could result ininsolvency.

Lack of proper policies and procedures.




Problem assets to capital ratio above 50%.

Law a u tho r ize CBI t o se nd an c us t od ian fo r a ssessme nt an d r e comme nd ati o ns.



Management

Rating factorsQuality of the monitoring and support.Development and implementation of written policies,procedures, MIS, risk monitoring system, reporting,safeguarding of documents, contingency plan and compliancewith laws and regulationsAudit

Profit per BranchBusiness per EmployeeProfit per Employee



Management rating 1

Management rating ´1µ indicates a strong andcommitted management.



Management rating 2

Management rating ´2µ has the general characteristics of´1µ but possesses some deficiencies in rating factors,that can be easily corrected without regulatory

supervision.

Careful consideration should be given to the financialcondition of the bank.



Management rating 3

Among the problems are:

Disregard for regulatory requirementsPoor assessment of risks and planningInappropriate reactions to economic adversitiesLack of proper written policies and procedures



Management rating 4

Management rating ´4µ indicates major weaknessesin several areas.

Strong regulatory action is needed.

Board of Directors should consider replacing or

strengthen management .



Management rating 5

Management rating ´5µ requires immediate andstrong supervisory actions:

Bank displays strong weaknesses in all areasPoor financial performanceInsolvency very likely



- Percentage Growth in Net Profits- Spread- Net Profit to Average Assets- Interest Income to Total Income- Non-Interest Income to Total Income

It refers to the net profit that is made by the bank. Higher earningimplies bank is doing well but one should look whether this earning is onaccount of core banking that is interest income or from other incomes.

Earnings



Rating factors

Earnings are rated according to the following factors:

Sufficient earnings to cover potential losses, provideadequate capital and pay reasonable dividends

Earnings exposure to market risks, such as interest ratevariations, foreign exchange fluctuations and price risk



Earnings rating 1

Rating ´1µ indicates:

Sufficient income to meet reserve requirements,provide capital growth and pay reasonabledividends to shareholders

Strong budgeting, planning and control of incomeand expenses



Earnings rating 2

Rating ´2µ indicates that the bank generates sufficientincome to meet reserve requirements, provide capitalgrowth and pay dividends. Nevertheless there may besome negative trends such as:

Need to improve budget, planning and controlprocess



Earnings rating 3

Earnings rating ´3µ shows that the bank has majorweaknesses in several of the rating factors.

Regulatory supervision is needed to ensure management takesappropriate measures to improve earnings performance



Earning rating 4

Earning rating ´4µ indicates bank is experiencingsevere earnings problems.

Net profit may be positive, but insufficient to maintainadequate reserves and capital growth.



Earning rating 5

Earning rating ´5µ shows bank is experiencing majorlosses that may lead into insolvency.

Immediate action is needed and strong regulatory supervisionis required from CBI



- Liquid Assets to Total Assets

- Liquid Assets to Total Deposits

The ability to generate cash or turn quickly shortterm assets into cash

Liquidity



Liquidity rating 1

Sufficient liquid assets to meet loan demand andunexpected deposit reduction

Little reliance on inter-bank market



Liquidity rating 2

Bank meets its liquidity requirements, but managementlacks proper expertise for planning, control and

monitoring

Management is unaware of negative trends



Liquidity rating 3

Liquidity ratingµ3µ indicates a bank has majorweaknesses in several factors.

Poor liquidity management

Regulatory supervision is usually required to assure

management is taking care of the problems



Liquidity rating 4

Severe liquidity problems.

Management must engage in extensive planning to deal with thesituation.



Liquidity rating 5

Liquidity ratingµ5µ shows a bank requiresoutside financial assistance to meet current liquidityrequirements to prevent failure of the bank due to theinability to meet creditors and depositors needs.



Sensitivity to market risk

BetaMarket risk is based primarily on the following evaluation factors:

Sensitivity to adverse changes in interest rates, foreignexchange ratesTrends in the foreign currencies exposure

Changes in the value of the fixed assets of the bank



C omposite rating

The composite rating assigned is not an arithmeticaverage of the component ratings, but is based on aqualitative analysis of the factors comprising each

component, the interrelationship between components,and the overall level of supervisory concern about thebank.



C omposite rating 1

Banks with a composite rating of ´1µ are:

sound in all aspects,

generally have components rated 1 or 2

compliance with laws and regulations.

Any weaknesses can be handled routinely by theboard of directors and management.

stable

well managed

capable of withstanding all but the most severe

economic downturns.



C omposite rating 2

Banks with a composite rating of 2 are:

fundamentally sound;

generally no component is rated higher than ´3µ,

moderate weaknesses are present

well within the capabilities of the board of directors·and management·s capability and willingness to correct .



C omposite rating 3

Banks rated ´3µ generally have:

weaknesses in one or more component areas that if not

corrected within a reasonable time frame could result insignificant solvency or liquidity concerns.

CBI should consider the need for administrative actions



C omposite rating 4

Banks rated ´4µ indicate:

serious unsafe and unsound practices

serious financial or managerial deficiencies

Incapable board of directors and management.

significant violations with laws and regulations.



C omposite rating 5

Banks rated ´5µ exhibit :

extremely unsafe and unsound practices or conditions,

The volume and severity of problems are beyondmanagement·s ability or willingness to control orcorrect.

Failure is highly probable



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