Dr. Enayet Karim: The criteria for measuring the performance of all the commercial banks including capital adequacy, asset quality, management soundness, earnings & profitability, liquidity and sensitivity to market risk (CAMELS) are as follows;
Capital: In capital adequacy, only when a bank’s risk weighted asset to capital and reserve kept properly then it is rated as ‘strong’ or ‘A-class’.
The rating remarks are as follows:
(4) Marginal, and
Asset Quality: The asset quality is judged on the basis of percentage of classified loans and advances to total loans & advances and it is given top rating if the percentage is less than 2 per cent.
Management: Of the five criteria, management quality is based on the bank’s performance in other four important areas.
According to the CAMELS report, management itself has no rating. It is determined on the average of ratings attributed to capital, asset quality, liquidity, earning and market sensitivity. It is based on operating ratio, profit per employee, overhead expenses per employee, gross earning assets to total assets and classified assets to earning assets.
Earning: Earnings of the banks are judged on the basis of return on assets (ROA). It is calculated on the basis of net profit after taxes (deduction of shortfall) divided by total assets. If the ROA is 1.8 per cent and above, then it is given the top ranking mark. Other rankings are: (2) satisfactory (ROA between 0.60 to 1.80 per cent), (3) fair (ROA between 0.25 and less than 0.60 per cent), (4) marginal (ROA between 0.01 and less than 0.25 per cent) and (5) unsatisfactory (if incurring losses).
Liquidity: The liquidity of a bank is determined on the basis of four considerations. These are: (a) maintenance of cash reserve ratio (CRR) and statutory liquidity ratio (SLR), (b) loan-deposit ratio should have up to 82 per cent. If it exceeds 82 per cent, then availability of adequate resources of fund (net worth, bills payable, provisions etc.) is required, (c) dependence on inter-bank deposits/borrowings for maintaining proper liquidity and (d) profitability.
Sensitivity to the market risk: Sensitivity to the market risk is the assessment degree to which a bank might be exposed to adverse financial market conditions. It is also asses on the movement of interest rate of a bank. Interest spread gap is also a wing of sensitivity measurement. If the interest gap between deposit and advance goes up more than 4% then the market sensitivity earmarks as satisfactory, fair, marginal or unsatisfactory gradually.
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