journal p karthikeyan

IJMRR/ April 2014/ Volume 4/Issue 4/Article No-2/449-454 ISSN: 2249-7196

*Corresponding Author www.ijmrr.com 449

INTERNATIONAL JOURNAL OF MANAGEMENT RESEARCH

AND REVIEW

CALIBRATING FINANCIAL SOUNDNESS AMONG SELECTED PRIVATE

SECTOR BANKS IN INDIA BY USING CAMEL MODEL

Dr.P.Karthikeyan*1, B.Shangari

2

1Assistant Professor (Sr.Grade), School of Management Studies, Kongu Engineering College,

Perundurai, Erode, India.

2Student, School of Management Studies, Kongu Engineering College, Perundurai, Erode,

India.

ABSTRACT

The present study attempts to show the relative financial position and performance of each

bank and a comparative result over a five year period from 2009 to 2013. This study aimed at

top six private sector banks based on the statistical information of net profit, total assets and

market capitalization during the year 2013. In recent years, the private sector banks give a

very tough competition in terms of Capital Adequacy, Asset Quality, Management

Efficiency, Earning Capacity and Asset Quality hence CAMEL model is been chosen for the

study. The entire study is based on the secondary data, procured and extracted from financial

statements of the selected privatized banks. The collected data is analyzed using various

financial ratios and statistical tools.

Keywords: CAMEL model, Private Sector Banks, Financial Soundness.

1. INTRODUCTION

A resilient and vibrant banking system is very crucial for sound and accelerated economic

growth.The increased presence of the private during the present decade has made the market

structure of the banking sector in terms of competitive pricing of services, narrow spreads,

and improving the quality of the services. Thus the present study is necessitated to examine

the performance of private sector banks during the period 2009-2013. For the comparative

performance top six private sector banks in India during the period of 2013 are been

undertaken for the study. The selected private sector banks are: ICICI, HDFC, AXIS,

KOTAK, INDUSIND and YES bank.

It is important to measure soundness across various banks in the country, identify the weaker

sections of the banking sector, devise appropriate strategies and policies to lift these sections

and eventually create an environment that leads banks to converge in soundness and result in

a consistently stable system. Reserve Bank of India recommended supervisory rating model

named as CAMELS for rating of Indian commercial Banks and Foreign Banks operating in

India to measure the performance of the banks.


Copyright 2012 Published by IJMRR. All rights reserved 450

2. RESEARCH FRAMEWORK

2.1. Research Gap and Statement of the problem

There have been a number of valuable studies on predicting the performance of the banks

based on CAMEL model but the present study intends to manipulate the performance of the

selected top six private sector banks based on both financial ratios and statistical tools.

Despite of the presence of numerous banks functioning in the country most of the people

randomly prefer to accumulate their valuable processions only based on the advertised

interest rate by that particular bank but they fail to show interest on the real operating position

or growth of the banks.

The ultimate aim of people is to have their valuable possession to be transacted or to be kept

in safe manner. But the list of private sector banks in India is around 24

(http://www.iba.org.in). So ultimately people will end up in confusion in selecting the best

bank because of the varying market condition in India for the past few years. This study

attempts to measure the relative performance of selected private sector banks to conclude its

position in the current trend (1st April 2009 to 31st March 2013).

2.2 Objectives of the Study

To study the financial soundness of the selected private sector banks in India by using

CAMEL model.

To make a comparative analysis of major Private Sector banks by using various financial

ratios and statistical analysis including Composite Ranking Method.

To suggest the way and means by which the banks can improve its financial soundness in

order to embed themselves to be successful in the prevailing competitive nature of the

materialized world.

2.3. Research Methodology

The present study is purely an analytical Research Design. For analyzing the financial

soundness, six leading private sector banks are selected on the basis of their total assets,

market capitalization and net profit for the year concerning 2013 over the period of 2009 to

2013. Judgmental sampling is adopted for the study and it depends on secondary data.

Suitable financial and Statistical techniques are used for analysis.

3. REVIEW OF LITERATURE

Various studies relating to the financial performance of banks have been conducted by

researchers. Few are been considered for gaining knowledge regarding the trends of banking

sector. Kushalappa.S & Sharmila Kunder (2013) evaluated the financial performance of

top 5 public and private sector banks of India. The study clearly showed that there is

significant difference among public and private sector banks with regard to the financial

performance and Sultan Singh, Sahila Choudhry & Mohina (2013) identified the liquidity

of selected private sector Indian banks in India by using CAMEL Model ratios for a period of

eleven years i.e. from 2000-01 to 2010-11 and finds, there is no significant difference in the



ratio of liquid assets to total assets and liquid assets to demand deposits in selected banks

during the period.

Sahila Chaudhry (2012) made an attempt to analyze the performance of selected private and

foreign banks in India on the basis of parameters recommended in CAMEL Model.

Dr.Nagarajan.G, Asif Ali and Sathyanarayana.N (2013) found that the financial

performance of ICICI sounds better than SBI and there is a significant impact of income on

profitability of SBI and ICICI banks. Dr.Dhanabhakyam.M And Kavitha.M (2012) noticed

the financial performance of the selected public sector banks have performed well on the

sources of growth rate and financial efficiency. Cheenu Goel And Chitwan Bhutani Rekhi

(2013), studied about the relative performance of Indian banks and finds new banks are more

efficient than that of the old ones and the public sector banks. Mr.Prasad.K.V.N (2012),

diagnosed that there is no significant difference between the performance of 26 public and 13

private sector banks. Morteza et al (2013) pointed out the CAMEL model which includes

dimensions such as capital adequacy, asset quality, management quality, earning performance

and liquidity to evaluate and compare the financial performance of public and private banks.

4. ANALYSIS AND INTERPRETATION

Table 1: Composite Ranking of Banks in Capital Adequacy (2009-13)

BANK

Capital adequacy

ratio

Net advances to

total assets

Government

securities to total

investment

Group rank

Avg Rank Avg Rank Avg Rank Avg Rank

ICICI 0.183 2 0.537 6 0.462 6 4.67 6

HDFC 0.165 4 0.575 3 0.814 2 3.00 2

AXIS 0.146 6 0.578 2 0.618 4 4.00 4

KOTAK 0.186 1 0.568 4 4.161 1 2.00 1

INDUSIND 0.146 5 1.053 1 0.774 3 3.00 2

YES 0.180 3 0.545 5 0.605 5 4.33 5

Source: Data based on Banks Annual report and Calculation was made using SPSS.

From table 1, on the basis of group averages of three sub-parameters of Capital Adequacy,

KOTAK bank is at the top position with group average of 2.00, followed by HDFC and

INDUSIND bank. ICICI bank stood at the last position due to its poor performance in CAR,

Advances to assets and also due to less investment in Govt. Securities.

Table 2: Composite Ranking of Banks in Asset Quality (2009-13)

BANK

Gross NPA to

Net Advances

Net NPA of

Net Advances

NPA to Total

Assets

Tot. Investments

to Tot. Assets

Group Rank

Avg Rank Avg Rank Avg Rank Avg Rank Avg Rank

ICICI 0.043 6 0.013 6 0.007 5 0.318 4 5.25 6

HDFC 0.013 4 0.003 2 0.002 2 0.279 1 2.25 2

AXIS 0.012 2 0.003 3 0.002 3 0.316 3 2.75 3

KOTAK 0.016 5 0.008 5 0.004 4 0.293 2 4.00 4

INDUSIND 0.012 3 0.005 4 0.008 6 0.519 6 4.75 5

YES 0.003 1 0.001 1 0.001 1 0.344 5 2.00 1

From table 2, on the basis of group averages of sub-parameters of assets quality, YES bank

had the highest group average of 2.00, followed by HDFC bank (2.25) and AXIS bank (2.75).

ICICI Bank (5.25) was positioned last in terms of Assets Quality.



Table 3: Composite Ranking of Banks in Management Efficiency (2009-13)

BANK Total Advances to

Total Deposits

Business per

Employee

Profit per

Employee

Group Rank

Avg. Rank Avg. Rank Avg. Rank Avg. Rank

ICICI 0.916 2 0.073 4 0.016 2 2.67 1

HDFC 0.772 4 0.062 5 0.017 1 3.33 2.5

AXIS 0.748 6 0.121 2 0.013 3 3.67 4

KOTAK 1.121 1 0.053 6 0.001 5 4.00 5.5

INDUSIND 0.778 3 0.083 3 0.001 6 4.00 5.5

YES 0.764 5 0.165 1 0.002 4 3.33 2.5


From table 3, on the basis of group averages of three sub-parameters of Management

Efficiency, ICICI bank is at the top position with group average of 2.67, followed by HDFC

and YES bank. KOTAK and INDUSIND bank stood at the last position due to its poor

performance in Business per Employee and Profit per Employee respectively.

Table 4: Composite Ranking of Banks in Earning Quality (2009-13)


From table 4, on the basis of group averages of 4 sub-parameters of Earnings Quality, YES

bank is at the top followed by HDFC Bank and AXIS bank. ICICI bank was at the last

position due to poor performance in Spread to Total Assets.

Table 5: Composite Ranking of Banks in Liquidity (2009-13)

BANK Liquidity Asset

to Total Asset

Govt.Security to

Total Assets

Liquid assets to

Total Deposits

GROUP RANK

Avg Rank Avg Rank Average Rank Avg Rank

ICICI 0.085 3 0.145 6 0.146 1 3.33 3

HDFC 0.093 2 0.228 4 0.125 2 2.67 2

AXIS 0.077 4 0.195 5 0.097 5 4.67 6

KOTAK 0.058 6 0.239 3 0.108 3 4.00 4

INDUSIND 0.132 1 0.403 2 0.099 4 2.33 1

YES 0.061 5 7.333 1 0.086 6 4.00 4


From table 5, on the basis of group averages of 3 sub-parameters of Liquidity, INDUSIND

bank was at the top followed by HDFC bank, ICICI bank. AXIS bank was at the last position.

5. RESULTS AND DISCUSSION

The composite ranking method defines the position of ICICI, HDFC, Axis, Kotak, IndusInd

And Yes bank. These method categories the banks according to its ranking based on capital

BANK Operating

Profit to Avg

Working Fund

Spread to Total

Assets

Net Profit to

Avg. Asset

Interest Income

to Total Income

Group Rank

Avg Rank Avg Rank Avg Rank Avg Rank Avg Rank

ICICI 0.034 1 0.013 6 0.013 5 0.754 5 4.25 6

HDFC 0.031 2 0.015 4 0.016 4 0.823 3 3.25 2

AXIS 0.031 3 0.014 5 0.053 1 0.780 4 3.25 2

KOTAK 0.030 4 0.020 3 0.016 2 0.602 6 3.75 4 INDUSIND 0.024 6 10.897 2 0.012 6 0.835 2 4.00 5 YES 0.027 5 10.899 1 0.016 3 0.848 1 2.50 1



adequacy, asset quality, management efficiency, earning quality and liquidity. There is

Negative correlation exists between Capital Adequacy ratio and Net Advances to Total

Assets in Capital Adequacy Ratio. The study also gave the interpretation of there is no

correlation exists between the ratios of Management Efficiency, Earning Quality and

Liquidity.

The bank should focus on improving the liquidity position in order to meet out its current

obligations. The failure of having sufficient liquidity will result in the loss of creditors

confidence. The earning quality of the bank can be improved by increasing the net and

operating profits through their efficient technology. The credit policy used by the bank can

further be improvised so that foreclosures can be reduced. The creditworthiness of the banks

can further be improved by having a proper internal audit team.

The present research work analyzes the overall financial performance of leading private

sector banks in India through application of CAMEL Model. Besides it also attempts to

compare the performance of these Banks with the help of various statistical tools such as

Ratio Analysis, Descriptive Statistics, Correlation, Analysis of Variance, Composite Ranking

Method and Correspondence Analysis.Overall, analysis supports the conclusion that HDFC

bank is more efficient than other banks. The private sector banks are as profitable as other

sectors are. It can be concluded that there is an urgent need of spreading the awareness

among the common people.

6. CONCLUSION

A good bank is not only the financial heart of the community, but also one with an obligation

of helping in every possible manner to improve the economic conditions of the common

people. The growth and financial stability of the country depends on the financial soundness

of its banking sector. They have control over a large part of the supply of money in

circulation. Nowadays the function of bank is not limited with in the same geographical limit

of any country and it is difficult to know about their esteemed soundness at a glance

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