What is CAMELS Rating Model

CAMELS is an acronym for a rating model through which banks are rated and given rating points on the basis of various parameters. CAMELS evaluates the bank on the following six parameters –

1. Capital Adequacy – Capital adequacy is measured by the ratio of capital to risk weighted assets. A healthy capital adequacy ratio strengthens the confidence of depositors in the bank.

2. Asset Quality – It takes into account the percentage of banks loans which are NPA (non performing assets), higher NPA implies that loans given banks are of lower quality and therefore not a good thing for the bank.

3. Management – It refers to the ratio of non- interest expenditure like done by bank higher percentage of such expenditure implies that bank management is not good at controlling the needless expenses.

4. Earnings – It refers to the net profit that is made by bank after taking into all factors. Higher earning implies bank is doing well but one should look whether this earning is on account of core banking that is interest income or from other incomes.

5. Liquidity – Higher liquidity implies that bank will be able to withstand any unexpected withdrawals by the depositors of the bank and also bank will be able to earn higher interest in call markets if there is liquidity crunch.

6. Systems and Control – It refers to internal control and the risk management system which bank follow.

After evaluating all the six factors bank is given rating which may be range from 1 to 5, 1 indicating bank is in strong position and 5 indicating the bank fundamentals are weak.

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