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Performance Measurement System in Indian Banking Sector in Camel Framework

CHAPTER SIX

PERFORMANCE MEASUREMENT SYSTEM IN INDIAN BANKING SECTOR IN CAMEL FRAMEWORK

A sound financial system is indispensable for a healthy and vibrant economy. The banking sector constitutes a predominant component of the financial services industry. The performance of any economy to a large extent is dependent on the performance of the banking sector. The banking sectors performance is seen as the replica of economic activities of the nation as a healthy banking system acts as the bedrock of social, economic and industrial growth of a nation. Banking institutions in our country have been assigned a significant role in financing the process of planned economic growth. During the past six decades since independence, the banking sector has witnessed significant changes and has surely come a long way from the days of nationalisation during early 1970s to the advent of liberalization, privatization and globalization, in the post-991 era. The flurry of reforms witnessed over the last one and half decade has brought about significant changes in the banking arena in the country. Leveraging on their new found tech-savvy and increased thrust on product/service innovation, the banks in the country witnessed a phenomenal growth in the last few years as the economic growth moved up into top gear to be amongst top in the world. The Asian crisis of 1997 and the recent events like the US sub prime crisis have once again underlined the significance of a strong and robust financial sector for smooth and efficient allocation of resources. Indian banks, which initially were in a denial mode about the impact of crisis (on them), but soon admitted to vulnerability to global shocks, have shown remarkable resilience, thanks to the Reserve Bank of Indias timely and prudent measures which saved the domestic banks from the blushes of the worst financial crisis. Life seems to be returning to normal in the global banking sector after it was hard hit by the financial catastrophe, which unravelled in September, 2008, as better than expected results from banks across the globe lend credence to the claims that stimulus efforts are finally yielding results. Against this background, it is important to measure the performance of the banking sector through a performance measurement system that provides an opportunity to assess the performance of Indian banks

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.. Performance Measurement System in Indian Banking Sector in Camel Framework

The present supervisory system in banking sector is a substantial improvement over the earlier system in terms of frequency, coverage and focus as also the tool employed. Majority of the Basel Core Principles for effective banking supervision have already been adhered to and rest is at the stage of implementation. Two supervisory rating models based on CAMELS (Capital Adequacy, Assets Quality, Management, Earning, Liquidity, Systems and Controls) and CACS (Capital Adequacy, Assets Quality, Compliance, Systems and Controls) factors for rating of Indian commercial Banks and Foreign Banks operating in India respectively, have been worked out on the lines recommended by Padmanabhan Working Group (1995). These ratings would enable the RBI to identify the banks whose condition warrants special supervisory attention (Bodla and Verma, 2006). Two decades have elapsed since the initiation of banking sector reforms in India. Over this period, the banking sector has experienced a paradigm shift. Hence, it is high time to make performance appraisal of this sector. Accordingly, a framework for the evaluation of the current strength of the system, and of operations and the performance of the banks has been provided by Reserve Banks measuring rod of CAMELS which stands for capital adequacy, assets quality, management efficiency, earning quality, liquidity and internal control systems. The main endeavour of CAMEL system is to detect problems before they manifest themselves. The RBI has instituted this mechanism for critical analysis of the balance-sheet of banks by themselves and presentation of such analysis to provide for internal assessment of the health of banks. The analysis, which is made available to the RBI, forms a supplement to the system of off-site monitoring of banks. The prime objective of the CAMEL model of rating banking institutions is to catch up the comparative performance of various banks (Bodla and Verma, 2006). CAMEL is, basically, a ratio-based model for evaluating the performance of banks. It is a model for ranking/rating of the banks. The prime objective of this chapter is to measure the performance of banking sector by dividing banks into public and private sectors as explained earlier. Various ratios forming the model are explained as follows (Joshi and Joshi, 2002):

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.. Performance Measurement System in Indian Banking Sector in Camel Framework

Capital Adequacy Capital adequacy has emerged as one of the major indicators of the financial health of a banking entity. It is important for a bank to maintain depositors confidence and preventing the bank from going bankrupt. Capital is seen as a cushion to protect depositors and promote the stability and efficiency of financial system around the world. Capital Adequacy reflects the overall financial condition of the banks and also the ability of management to meet the need for additional capital. It also indicates whether the bank has enough capital to absorb unexpected losses. Capital Adequacy Ratio acts as an indicator of bank leverage. The following ratios measure Capital Adequacy: 1. Capital adequacy ratio (CAR) The banks are required to maintain the capital adequacy ratio (CAR) as specified by RBI from time to time. As per the latest RBI norms, the banks in India should have a CAR of 12%. It is arrived at by dividing the sum of Tier-I, Tier-II and Tier-III capital by aggregate of risk weighted assets (RWA). Symbolically, CAR= (Tier-I + Tier-II + Tier-III)/RWA Tier-I capital includes equity capital and free reserves. Tier-II capital comprises of subordinate debt of 5-7 years tenure, revaluation reserves, hybrid debt capital instruments and undisclosed reserves and cumulative perpetual preference shares. Tier-III capital comprises of short-term subordinate debt. The higher the CAR, the stronger the bank. 2. Debt-Equity Ratio This ratio indicates the degree of leverage of a bank. It indicates how much of the bank business is financed through debt and how much through equity. Debt-Equity ratio is arrived at by dividing total borrowings and deposits by shareholders net worth, which includes equity capital, and reserves and surpluses. Higher ratio indicates less protection for the creditors and depositors in the banking system. 3. Advances to Assets This is a ratio of the Total Advances to Total Assets. This ratio indicates a banks aggressiveness in lending which ultimately results in better profitability. Total

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.. Performance Measurement System in Indian Banking Sector in Camel Framework

advances also include receivables. The value of Total Assets excludes the revaluation of all the assets. 4. Government Securities to Total Investments This ratio shows the risk involved in a banks investment. Government Securities, are generally, considered as the most safe debt instrument, which, as a result, carries the lowest return. Since government securities are risk-free, the higher the Government Securities to investment ratio, the lower the risk involved in a banks investment. It is arrived at by dividing the amount invested in government securities by total investment. Assets Quality The quality of assets is an important parameter to gauge the degree of financial strength. The prime motto behind measuring the assets quality is to ascertain the component of Non-Performing Assets (NPAs) as a percentage of the total assets. This indicates what types of advances the bank has made to generate interest income. Thus, assets quality indicates the type of the debtors the bank is having. The following ratios are necessary to assess assets quality: 1. Gross NPAs to Net Advance It is a measure of the quality of assets in a situation, where the management has not provided for loss on NPAs. The Gross NPAs are measured as a percentage of Net Advances. The lower the ratio, the better is the quality of advances. 2. Net NPAs to Net Advances It is a measure of the quality of assets in a situation where the management has not provided for loss on NPAs. Net NPAs are Gross NPAs net of provisions on NPAs and interest in suspense account. In this ratio, Net NPAs are measured as a percentage of net advances. 3. Total Investments to Total Assets Ratio Total investments to total assets indicate the extent of deployment of assets in investment as against advances. This ratio is used as a tool to measure the percentage of total assets locked up in investments, which, by conventional definition, does not form part of the core income of a bank. It is arrived at by dividing total investments by total

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assets. A higher ratio means that the bank has conservatively kept a high cushion of investments to guard against NPAs. 4. Net NPAs to Total Assets It is a measure of the quality of assets in a situation where the management has not provided for loss on NPAs. Here, the Net NPAs are measured as a percentage of Total Assets. The lower the ratio, the better is the quality of advances. 5. Percentage Change in Net NPAs This measure gives the movement in Net NPAs in relation to Net NPAs in the previous year. The higher the reduction in Net NPAs levels, the better is for the bank. It is given by the formula: %Change in Net NPAs = (Net NPAs at the end of the year Net NPAs at the beginning of the year)/Net NPAs at the beginning of the year. Management Efficiency Management efficiency is another vital component of the CAMEL Model that ensures the survival and growth of a bank. The ratios in this segment involve subjective analysis and efficiency of management. The management of the bank takes crucial decisions depending on the risk perception. It sets vision and goals for the organization and sees that it achieves them. This parameter is used to evaluate management efficiency as to assign premium to better quality banks and discount poorly managed ones. The ratios used to evaluate management efficiency are described as under: 1. Total advances to Total Deposits The ratio measures the efficiency of management in converting the deposits available with the bank (excluding other funds like equity capital, etc.) into high earning advances. Total deposits include demand deposits, savings deposits, term deposits and deposits of other banks. Total advances also include the receivables. 2. Business per Employee This tool measures the efficiency of all the employees of a bank in generating business for the bank. It is arrived at by dividing the total business by total number of employees. By business, we mean the sum of total deposits and total advances in a particular year.

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3.

Profit per Employee This ratio measures the efficiency of employees at the branch level. It also gives

valuable inputs to assess the real strength of a banks branch network. It is arrived at by dividing the Profit after Tax (PAT) earned by the bank by the total number of employees. The higher the ratio, higher is the efficiency of the management. 4. Return on Net Worth It is a measure of the profitability of a bank. Here, PAT is expressed as a percentage of Average Net Worth. Earning Quality Earning quality reflects quality of a banks profitability and its ability to earn consistently. The quality of earning is a very important criterion that determines the ability of a bank to earn consistently, going into the future. It basically determines the profitability of the bank. It also explains the sustainability and growth in earnings in the future. This parameter gains importance in the light of the argument that much of banks income is earned through non-core activities like investments, treasury operation, and corporate advisory service and so on. The following ratios try to assess the quality of income in terms of income generated by core activity-income from lending operation. 1. Operating Profit to Average Working Funds Ratio This ratio indicates how much a bank can earn from its operations net of the operating expenses for every rupee spent on working funds. This is arrived at by dividing the operating profit by average working funds. Average Working Funds (AWF) are the total resources (total assets or liabilities) employed by a bank. It is daily average of total assets / liabilities during a year. The better utilization of funds will result in higher operating profit. Thus, this ratio will indicate how a bank has employed its working funds in generating profit. 2. Spread or Net Interest Margin (NIM) to Total Assets NIM, being the difference between the interest income and the interest expended as a percentage of total assets. It is an important measure of a banks core income (income from lending operations). A higher spread indicates the better earnings

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.. Performance Measurement System in Indian Banking Sector in Camel Framework

given the total assets. Interest income includes dividend income and interest expended included interest paid on deposits, loan from the RBI, and other short-term and longterm loans. 3. Net Profit to Average Assets / Return on Average Capital Employed This ratio measures return on assets employed or the efficiency in utilization of assets. It is arrived at by dividing the net profit by average assets, which is the average of total assets in the current year and previous year. Thus, this ratio measures the return on assets employed. Higher ratio indicates better earning potential in the future. 4. Interest Income to Total Income Interest income is a basic source of revenue for banks. The interest income to total income indicates the ability of the bank in generating income from its lending. This ratio measures the income from lending operations as a percentage of the total income generated by the bank in a year. Interest income includes income on advances, interest on deposits with the RBI, and dividend income. 5. Non- interest Income to Total Income This measures the income from operations other than lending as a percentage of the total income. A fee-based income account for a major portion of a banks other incomes. The bank generates higher fee income through innovative products and adapting the technology for sustained service levels. Non-interest income is the income earned by the banks excluding income on advances and deposits with the RBI. Liquidity Liquidity is very important for any organization dealing with money. For a bank, liquidity is a crucial aspect which represents its ability to meet its financial obligations. It is of utmost importance for a bank to maintain correct level of liquidity, which will otherwise lead to declined earnings. Banks have to take proper care in hedging liquidity risk, while at the same time ensuring that a good percentage of funds are invested in higher return generating investments, so that banks can generate profit while at the same time provide liquidity to the depositors. Among a banks assets, cash investments are the most liquid. A high liquidity ratio indicates that the bank is more affluent. The ratios suggested to measure liquidity under CAMEL Model are as follows: 196

.. Performance Measurement System in Indian Banking Sector in Camel Framework

1.

Liquid Assets to Total Assets Liquid Assets include cash in hand, balance with the RBI, balance with other

banks (both in India and abroad), and money at call and short notice. This ratio is arrived by dividing liquid assets by total assets. The proportion of liquid assets to total assets indicates the overall liquidity position of the bank. 2. Government Securities to Total Assets Government securities are the most liquid and safe investment. This ratio measures the proportion of risk-free liquid assets invested in government securities as a percentage of the assets held by the bank and is arrived by dividing investment in government securities by the total assets. This ratio measures the risk involved in the assets held by a bank. 3. Liquid Assets to Demand Deposits This ratio measures the ability of a bank to meet the demand from demand deposits in a particular year. It is arrived at by dividing the liquid assets by total demand deposits. The liquid assets include cash in hand, balance with the RBI, balance with other banks (both in India and abroad), and money at call and short notice. 4. Liquid Assets to Total Deposits This ratio measures the liquidity available to the depositors of a bank. Liquid assets include cash in hand, balance with the RBI, balance with other banks (both in India and abroad), and money at call and short notice. Total deposits include demand deposits, savings deposits, term deposits and deposits of other financial institutions. 5. Approved Securities to Total Assets This is arrived at by dividing the total amount invested in approved securities by total assets. Approved securities are investments made in the state-associated bodies like electricity boards, housing boards, corporation bonds, share of regional rural banks (Joshi and joshi,2002; Bodla and Verma, 2006; Sisdiya et al.,2008).

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Bankers' Opinion Regarding Importance of Various Ratios of Capital Adequacy Under CAMEL Model CAMEL Model is basically a ratio based Performance Measurement System based on financial measures for measuring the performance of the banks. It is based on computation of different ratios to find out ranking of the banks according to their financial performance. CAMEL Model involves computation of various ratios such as Capital Adequacy, Asset Quality, Management Efficiency, Earning Quality and Liquidity of the banks. Different banks used different ratios (relationship) for each variable of CAMEL Model so as to find out ranking of various banks. To examine the opinion of bankers regarding the importance of various ratios under capital adequacy, they were asked to give their opinion about various ratios under Capital Adequacy. Their response has been presented in Table 6.1. The table reveals that majority of the bankers considered the capital adequacy ratio (96.50%) as the most important ratio followed by debt-equity ratio (82.00%), general securities to total investments (76.00%) and advances to total asset (75.00%). Table 6.1 Opinion of Bankers Regarding Various Ratios under Capital Adequacy N=200
Ratios Most Important Important Neither Unimportant Important Nor Unimportant 4 (2.0) 3 (1.5) Most Unimportant WAS

Capital Adequacy Ratio (CAR) Debt-equity Ratio Advances to Total Assets General Securities to Total Investments

142 (71.0)

51 (25.5)

0 (0.0) 4.28

82 (41.0) 54 (27.0) 54 (27.0)

82 (41.0) 96 (48.0) 96 (48.0)

28 (14.0) 37 (18.5) 39 (19.5)

6 (3.0) 10 (5.0) 11 (5.5)

2 (1.0) 3 (1.5) 0 (0.0) 3.97 3.94 4.18

Note: The figures given in parentheses show the percentages.

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Weighted average scores for all the bankers have been calculated by assigning appropriate weights with regard to all the ratios under capital adequacy norms. The weighted average scores indicate that all the bankers gave greater importance to all the listed ratios, viz. capital adequacy (4.28), debt-equity ratio (4.18) followed by general securities to total investments (3.97) and advances to total assets (3.94). Further, weighted average scores have also been calculated for the selected banks. Bank-wise analysis of both public and private sector banks with regard to importance of various ratios under Capital Adequacy has been presented in Table 6.2. Table 6.2 Weighted Average Scores Corresponding to Various Ratios under Capital Adequacy (Bank-wise Distribution)
Ratios Capital Adequacy Ratio (CAR) Debt-equity Ratio Advances to Total Assets Public Sector Banks SBI PNB CB Private Sector Banks Mean p-values

Total ICICI AXIS HDFC Total Values

4.06

4.54

4.57

4.38

4.29

3.87

4.34

4.18

4.28

0. 210

4.00

4.00

4.30

4.09

4.20

4.17

4.43

4.27

4.18

0.029*

3.74

3.80

4.17

3.89

4.11

3.77

4.06

3.99

3.94

0.225

General Securities 3.71 to Total Investments

3.69

4.17

3.84

4.00

3.77

4.46

4.09

3.97

0.030*

* Significant at 5 per cent level of significance. An overview of the weighted average scores as shown in the table reveals that bankers from private sector banks have accorded more importance to all the listed ratios under Capital Adequacy as compared to those from public sector banks except capital adequacy. It means public sector banks accord more importance to capital adequacy ratio which is the premier ratio of measures of Capital Adequacy of CAMEL framework.

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Table 6.2 reveals that among the selected public sector banks, bankers from Canara Bank assigned greater significance to all the ratios as compared to SBI and PNB. Similarly, among the selected private sector banks, bankers from HDFC Bank gave more importance to ratios like capital adequacy, debt-equity and general securities to total investments followed by ICICI Bank which accorded more significance to advances to total assets ratio as is reflected by their respective weighted average scores for each ratio under capital adequacy measure of CAMEL Model. The estimated p-values using Mann-Whitney U-test with regard to each ratio of capital adequacy show that there is a significant difference among public and private sector banks with regard to debt-equity ratio and general securities to total investments. As regards other ratios like capital adequacy and advances to total assets ratio, no significant variations have been observed (p-values>0.05). The null hypothesis that there is no significant difference in the perception of public and private sector bankers regarding importance of various ratios of capital adequacy under CAMEL Model stands accepted regarding ratios, such as capital adequacy ratio and advances to total assets ratio, but it stands rejected for ratios like debt-equity ratio and general securities to total investment ratio. Opinion of Bankers Regarding Importance of Various Ratios of Assets Quality under CAMEL Model To ascertain the opinion of bankers regarding importance of Assets Quality in CAMEL Model, they were asked to give their opinion regarding importance of various ratios as measures of Assets Quality. The response obtained from the bankers in this regard has been shown in Table 6.3. The table explains that all the bankers considered various ratios under assets quality, such as gross NPAs to net advances (96.00%) and net NPAs to net advances (92.50%) as the most important ratios followed by percentage change in net NPAs (89.00%), net NPAs to total assets (86.50%), and total investments to total assets (80.50%).

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.. Performance Measurement System in Indian Banking Sector in Camel Framework

Table 6.3 Opinion of Bankers Regarding Various Ratios under Assets Quality N=200
Ratios Most Important Important Neither important nor unimportan t 8 (4.0) Unimportant Most Unimportant WAS

Gross NPAs to Net Advances Net NPAs to Net Advances Total Investments to Total Assets Net NPAs to Total Assets Percentage Change in Net NPAs

132 (66.0)

60 (30.0)

0 (0.0)

0 (0.0)

4.61

129 (64.5) 76 (38.0)

56 (28.0) 85 (42.5)

14 (7.0) 37 (18.5)

1 (0.5) 2 (1.0)

0 (0.0) 0 (0.0)

4.56

4.15

111 (55.50) 125 (62.5)

62 (31.0) 53 (26.5)

25 (12.5) 19 (9.5)

2 (1.0) 3 (1.5)

0 (0.0) 0 (0.0)

4.39

4.41

Note: The figures given in parentheses denote the percentages.

It is pertinent to note that only negligible number of bankers have considered the ratios like percentage change in net NPAs (1.50%) followed by total investments to total assets and net NPAs to total assets (1.00% each) and net NPAs to net advances (0.50%) as unimportant to indicate the assets quality of the banks under CAMEL framework. Weighted average scores have been calculated for all the bankers with regard to various ratios under assets quality by putting appropriate weights. On the basis of weighted average scores, bankers considered all the ratios as important for measuring assets quality of the banks, such as gross NPAs to net Advances (4.61) and net NPAs to net advances (4.56) followed by percentage change in net NPAs (4.41), net NPAs total assets (4.39) and total investments to total assets (4.15).

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Further, weighted average scores have also been computed for the selected banks under study. Bank-wise analysis of both public and private sector banks with regard to various ratios as indicator of assets quality has been presented in Table 6.4. The weighted average scores presented in the table reveal that public sector banks have accorded greater significance to all these ratios of assets quality as compared to private sector banks except total investment to total assets. Table 6.4 Weighted Average Scores Corresponding to Various Ratios under Assets Quality (Bank-wise Distribution)
Ratios Gross NPAs to Net Advances Net NPAs to Net Advances Total Investments to Total Assets Net NPAs to Total Assets Percentage Change in Net NPAs Public Sector Banks Private Sector Banks Mean SBI PNB CB Total ICICI AXIS HDFC Total Values 4.69 4.86 4.57 4.71 4.49 4.60 4.46 4.51 4.61

p-values 0.045*

4.77

4.66

4.70

4.71

4.40

4.43

4.37

4.40

4.56

0.007*

3.77

4.09

4.40

4.07

4.43

4.13

4.09

4.22

4.15

0.098

4.11 4.34

4.60 4.69

4.67 4.53

4.45 4.52

4.57 4.63

4.23 4.10

4.17 4.14

4.33 4.30

4.39 4.41

0.259 0.154

* Significant at 5 per cent level of significance.

Among the selected public sector banks, there has been a mixed response to the different ratios under assets quality. The bankers from PNB accorded greater importance to gross NPAs to net advances (4.86) and percentage change in net NPAs (4.69), while bankers from SBI accorded importance to net NPAs to net advances (4.77). Ratios like total investment to total assets (4.40) and net NPAs to total assets (4.67) considered more important by the bankers from Canara Bank. Similarly, among the selected private sector banks, bankers from ICICI Bank accorded importance to ratios like total investments to total assets (4.43), percentage change in net NPAs (4.63) and net NPAs to total assets (4.57) followed by Axis Bank considering gross NPAs to 202

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net advances (4.60) and net NPAs to net advances (4.43) as most important ratios as indicator of assets quality of the banks under the CAMEL framework. The estimated p-values using Mann-Whitney U-test with regard to various ratios under assets quality show that there is a significant difference among pubic and private sector banks with regard to ratios, such as gross NPAs to net advances and net NPAs to net advances under the measure of assets quality of CAMEL framework (pvalues < 0.05). Bankers from public sector banks gave more importance to these ratios of assets quality as compared to private sector banks. For rest of the ratios of assets quality, such as total investment to total assets, net NPAs to total assets and percentage change in net NPAs, no significant difference among public and private sector banks have been observed (p-values > 0.05). In other words, both the banks assigned equal importance to the above mentioned ratios of assets quality as a measure of CAMEL framework. The null hypothesis that there is no significant difference in the perception of public and private sector bankers regarding importance of various ratios of assets quality under CAMEL Model stands accepted in all other ratios except gross NPAs to net Advances and net NPAs to net Advances. Bankers Opinion Regarding Various Ratios of Management Efficiency Uunder CAMEL Framework The importance of various ratios under the Management Efficiency as a measure of CAMEL framework has been examined on the basis of response obtained from the Bankers in this regard. The data pertaining to their response has been presented in Table 6.5. The table shows that majority of the bankers considered all the ratios important, but total advances to total deposits (93.00%) and business per employee (88.50%) appeared as the most important ratios of management efficiency under CAMEL framework.

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Table 6.5 Bankers Opinion Regarding Various Ratios under Management Efficiency N=200
Ratios Most Important 122 (61.0) 117 (58.5) 126 (63.0) 125 (62.5) Important Neither Unimportant Important Nor Unimportant 13 1 (6.5) (0.5) 22 (11.0) 17 (8.5) 23 (11.5) 5 (2.5) 5 (2.5) 1 (0.5) Most Unimportant AS 0 (0.0) 0 (0.0) 1 (0.5) 2 (1.0) 4.54 W

Total Advances to Total Deposits Return on Net Worth Business per Employee Profit per employee

64 (32.0) 56 (28.0) 51 (25.5) 49 (24.5)

4.43 4.48 4.47

Note: The figures given in parentheses indicate the percentages. Weighted average scores have been calculated for all the bankers regarding various ratios as measure of management efficiency by assigning appropriate weights. An overview of weighted average scores as shown in Table 6.5 reveals that bankers considered all the ratios, viz. total advances to total deposits (4.54), business per employee (4.48), profit per employee (4.47) and return on net worth (4.43) as important. Further, bank-wise weighted average scores have also been calculated with regard to public and private sector banks and presented in Table 6.6. The table reveals that public sector banks provided greater significance to all the ratio of management efficiency in comparison to private sector banks as is evident from their weighted average scores. Among the selected public sector banks, bankers from all the three banks under study gave importance to different ratios of management efficiency as a measure of CAMEL model. PNB accorded more importance to total advances to total deposits (4.63) and business per employee and profit per employee (4.71 each) followed by Canara Bank which accorded importance to return on net worth (4.80).

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Table 6.6 Weighted Average Scores Corresponding to Various Ratios under Management Efficiency (Bank-wise Distribution)
Ratios Public Sector Banks SBI Total Advances to total deposits Return on Net Worth Business per employee Profit per employee PNB CB Private Sector Banks Mean Values p-values

Total ICICI AXIS HDFC Total

4.46

4.63

4.57

4.55

4.71

4.60

4.26

4.52

4.54

0.905

4.46

4.40

4.80

4.54

4.51

4.03

4.34

4.31

4.43

0.163

4.51

4.71

4.63

4.62

4.37

4.43

4.23

4.34

4.48

0.004*

4.31

4.71

4.57

4.53

4.43

4.37

4.43

4.41

4.47

0.194

* Significant at 5 per cent level of significance. Similarly, among private sector banks, ICICI Bank gave more importance to all the listed ratios for measuring management efficiency except business per employee as compared to Axis Bank and HDFC Bank as shown by their respective weighted average scores. The Axis Bank gave importance to business per employee (4.43) as a measure of management efficiency when compared with other selected private sector banks. However, it is pertinent to note that HDFC Bank also assigned more importance to profit per employee (4.43). The estimated p-values using Mann-Whitney U-test with regard to all the listed ratios of management efficiency show that there is a significant difference among the public and private sector banks as far as business per employee ratio is concerned (pvalue<0.05). Bankers from the public sector banks gave more importance to business per employee ratio as a measure of management efficiency as compared to the private sector banks as is evident from their weighted average scores. Regarding other measures of management efficiency like total advances to total deposits, return on net worth and profit per employee, no significant difference between public and private sector banks has been observed. Both the banks accorded equal importance to the above

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mentioned measures of management efficiency as a measure of CAMEL framework. Thus, the null hypothesis that there is no significant difference in the perception of public and private sector bankers regarding importance of various ratios of management efficiency under CAMEL Model stands accepted except business per employee. Opinion of Bankers Regarding Importance of Various Ratios as a Measure of Earning Quality of the Banks under CAMEL Model The significance of various ratios under the Earning Quality as a measure of CAMEL framework has been examined on the basis of response obtained from the bankers in this regard The data pertaining to their response has been presented in Table 6.7. Table 6.7 Opinion of Bankers Regarding Various Ratios under Earning Quality N=200
Ratios Most Important Important Neither Unimportant Important Nor Unimportant 21 (10.5) 25 (12.5) 22 (11.0) 20 (10.0) 22 (11.0) 4 (2.0) 5 (2.5) 11 (5.5) 4 (2.0) 1 (0.5) Most Unimportant WAS

Operating Profits to Average Working Funds Spread Net Profit to Average Assets Interest Income to Total Income Noninterest Income to Total Income

99 (49.5) 107 (53.5) 79 (39.5) 74 (37.0) 94 (47.0)

76 (38.0) 62 (31.0) 87 (43.5) 101 (50.5) 80 (40.0)

0 (0.0) 1 (0.5) 1 (0.5) 1 (0.5) 3 (1.5)

4.35 4.35 4.16 4.22

4.31

Note: The figures given in parentheses show the percentages.

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.. Performance Measurement System in Indian Banking Sector in Camel Framework

The table shows that all the bankers have considered all the ratios of earning quality, such as operating profits to average working funds and interest income to total income (87.50% each) followed by non-interest income to total income (87.00%), spread (84.50%) and net profit to average assets (83.00%) as important to judge the earning quality of the banks. Weighted average scores have been computed for all the bankers with regard to various ratios as indicator of earning quality by assigning appropriate weights. The weighted average scores reveal that bankers considered all the ratios as important measure of earning quality of the banks, such as operating profits to average working funds and spread (4.35 each) followed by non-interest income to total income (4.31), interest income to total income (4.22) and net profit to average assets (4.16). Table 6.8 Weighted Average Scores Corresponding to Various Ratios under Earning Quality (Bank-wise Distribution)
Ratios Operating Profits to Average Working Funds Spread Net Profit to Average Assets Interest Income to Total Income Noninterest Income to Total Income Public Sector Banks Private Sector Banks SBI PNB CB Total ICICI AXIS HDFC Total 4.43 4.34 4.27 4.35 4.46 4.13 4.43 4.35 Mean Values 4.35 p-values

0.725

4.54 4.23

4.51 4.26

4.73 4.50

4.59 4.32

4.20 4.23

3.77 3.83

4.29 3.91

4.10 4.00

4.35 4.16

0.000* 0.024*

4.06

4.26

4.50

4.26

4.17

4.17

4.17

4.17

4.22

0.645

4.43

4.54

4.53

4.50

4.26

4.23

3.86

4.11

4.31

0.001*

* Significant at 5 per cent level of significance.

Further, weighted average scores have also been calculated for the selected banks of the study. Bank-wise analysis of both public and private sector banks regarding various ratios as a measure of earning quality have been presented in Table

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6.8. The table explains that weighted average scores of public sector banks against all the ratios are higher as compared to the private sector banks. Among the selected public sector banks, bankers from Canara Bank considered all the ratios, viz. spread (4.73), non-interest income to total income (4.54) and netprofit to average asset and interest income to total income (4.50 each) except operating profits to average working funds (4.43) ratio, which is considered by the bankers of SBI. Further, among the selected private sector banks, bankers from ICICI Bank gave more importance to all the ratios as a measure of earning quality except spread as compared to Axis Bank and HDFC Bank as shown by their weighted average scores. Bankers from HDFC Bank provided greater significance to spread (4.29) as compared to other two selected private sector banks. The estimated p-values using Mann-Whitney U-test with regard to all the listed ratios of earning quality show that there is a significant difference among public and private sector banks as regards ratios like spread, net profit to average assets and noninterest income to total income (p-values<0.05). Bankers from public sector banks gave more importance to these ratios as a measure of earning quality when compared with the Bankers from private sector banks. For rest of the measures of earning quality such as operating profits to average working funds and interest income to total income, no significant variations between public and private sector banks have been observed (pvalues >0.05). Both the banks accorded equal importance to these measures of earning quality as a measure of CAMEL framework. The null hypothesis that there is no significant difference in the perception of public and private sector bankers regarding importance of various ratios of earning quality under CAMEL Model stands accepted in ratios, such as operating profits to average working funds and interest income to total income ratio. However, it stands rejected for ratios like spread, net profit to average assets and non-interest income to total income ratio. Bankers Opinion Regarding Various Ratios of Liquidity as a Measure of CAMEL Framework To examine the opinion of bankers regarding the importance of various ratios of Liquidity as a measure of CAMEL framework, they were asked to give their opinion about all the listed ratios such as liquid assets to total assets, general securities to total

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assets, approved securities to total assets, liquid assets to demand deposits, and liquid assets to total deposits. The response obtained from the bankers in this regard has been presented in Table 6.9. Table 6.9 Bankers Opinion Regarding Various Ratios under Liquidity N=200
Ratios Most Important 111 (55.5) 46 (23.0) 65 (32.5) 88 (44.0) 82 (41.0) Important Neither Unimportant Important Nor Unimportant 18 0 (9.0) (0.0) 41 (20.5) 38 (19.0) 27 (13.5) 28 (14.0) 12 (6.0) 7 (3.5) 8 (4.0) 3 (1.5) Most Unimportant 1 (0.5) 3 (1.5) 4 (2.0) 2 (1.0) 2 (1.0) WA S 4.45

Liquid Assets to Total Assets General Securities to Total Assets Approved Securities to Total Assets Liquid Assets to Demand Deposits Liquid Assets to Total Deposits

70 (35.0) 98 (49.0) 86 (43.0) 75 (37.5) 85 (42.5)

3.86

4.01

4.20

4.21

Note: The figures given in parentheses denote the percentages. The table shows that the bankers have considered all the ratios of liquidity important. But the ratios, such as liquid assets to total assets (90.50%) and liquid assets to total deposits (83.50%) have been more important followed by liquid assets to demand deposits (81.50%), approved securities to total assets (75.50%) and general securities to total assets (72.00%). All these ratios depict the liquidity position of the banks. Weighted average scores have been calculated for all the bankers with regard to various ratios as a measure of liquidity of the banks by assigning appropriate weights. A glance at the weighted average scores given in Table 6.9 reveals that bankers considered the ratios, such as liquid assets to total assets (4.45), liquid assets to total deposits (4.21) and liquid assets to demand deposits (4.20) as more important and 209

.. Performance Measurement System in Indian Banking Sector in Camel Framework

approved securities to total assets (4.01) and general securities to total assets (3.86) as important. Further weighted average scores have also been calculated for the selected banks under study. Bank-wise analysis regarding various ratios as a measure of liquidity under CAMEL Model has been presented in Table 6.10. Table 6.10 Weighted Average Scores Corresponding to Various Ratios under Liquidity (Bank-wise Distribution)
Ratios Liquid Assets to Total Assets General Securities to Total Assets Approved Securities to Total Assets Liquid Assets to Demand Deposits Liquid Assets to Total Deposits Public Sector Banks Private Sector Banks Mean SBI PNB CB Total ICICI AXIS HDFC Total Values 4.54 4.54 4.63 4.57 4.40 4.30 4.29 4.33 4.45 p-values .010*

3.63

3.77

4.00

3.79

4.11

3.70

3.94

3.93

3.86

.242

3.69

3.86

4.27

3.92

4.31

3.87

4.06

4.09

4.01

.139

4.31

4.23

4.63

4.38

4.17

3.90

3.94

4.01

4.20

.003*

4.29

4.23

4.43

4.31

4.26

4.00

4.06

4.11

4.21

.249

* Significant at 5 per cent level of significance. The table shows that both the public and private sector banks have given importance to different ratios. The public sector banks gave more importance to liquid assets to total assets (4.57), liquid assets to demand deposits (4.38) and liquid assets to total deposits (4.31) followed by private sector banks which accorded importance to other ratios, such as approved securities to total assets (4.09) and general securities total assets (3.93). Among the selected public sector banks, bankers from Canara Bank accorded more importance to all the listed measures when compared to other selected public sector banks, such as SBI and PNB as indicated by their respective weighted average

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scores. Similarly, among the selected private sector banks, bankers from ICICI Bank accorded greater significance to various ratios in comparison to Axis Bank and HDFC Bank as measures of liquidity as shown by their respective weighted average scores. The estimated p-values using Mann-Whitney U-test with regard to all the listed ratios of liquidity show that there is a significant difference among public and private sector banks as far as ratios like liquid assets to total assets and liquid assets to demand deposits (p-values<0.05) are concerned. Bankers from public sector banks accorded more importance to these ratios (measures) of liquidity as compared to those from private sector banks. As far as other ratios like general securities to total assets, approved securities to total assets and liquid assets to total deposits, no significant variations between public and private sector banks have been observed. Both the banks gave equal significance to these ratios of liquidity as a measure of CAMEL framework. The null hypothesis that there is no significant difference in the perception of public sector and private bankers regarding importance of various ratios of liquidity under CAMEL Model stands accepted in all other ratios except liquid assets to total assets and liquid assets to demand deposits. The above analysis provides that both the public and private sector bankers accorded importance to various measures of CAMEL Model. An overview of all the measures, such as Capital Adequacy, Assets Quality, Management Efficiency, Earning Quality and Liquidity brings out that bankers from public sector considered these measures as well as various ratios under these measures more important for measuring the performance of the banks. In respect to Capital Adequacy parameters, there is a significance difference in the opinion of public and private sector bankers. The private sector banks accorded more importance to all the ratios under Capital Adequacy as measure of CAMEL Framework except capital adequacy ratio which is considered to be a premier ratio. The public sector bankers assigned more significance to this ratio of Capital Adequacy. With regard to importance of other measures of CAMEL Model, such as Assets Quality, Management Efficiency and Earning Quality, bankers from public sector gave more significance to all the ratios under these measures as compared to the private sector bankers. Regarding Liquidity measure of CAMEL Framework, public sector bankers gave more significance to all the ratios except general securities to total assets. The study shows that when these results were compared with the actual overall composite ranking of both public and private sector banks for the last 5 years, 211

.. Performance Measurement System in Indian Banking Sector in Camel Framework

much compatibility has been observed. The overall ranking for the period shows that public sector banks have shown an improvement, while in the case of private sector banks composite rank has been slipped from top to bottom as shown in Table 6.11. Table 6.11 Overall Composite Ranking of Public and Private Sector Banks for the Last Five Years in CAMEL Framework Year 2004-05 2005-06 2006-07 2007-08 2008-09 Public Sector Banks SBI PNB CB 8 3 16 18 9 10 23 19 12 21 9 17 21 2 13 Private Sector Banks ICICI AXIS HDFC 1 3 2 4 14 3 9 12 7 14 13 12 10 8 6

Source: Chartered Financial Analyst, The Analyst, Various Special Issues, October. As far as selected public sector banks are concerned, composite rank in case of PNB stands at number 2 nd whereas that of Canara Bank improved from 17 th to 13th. The SBI Bank maintained the same position for the last 2 years at 21 st rank. On the other hand, among the selected private sector banks, ICICI Bank, HDFC Bank and Axis Bank slipped from top three ranks to 10th rank, 6th rank and 8th rank respectively. On the whole, it is observed that public sector banks outperformed private sector banks with regard to CAMEL framework as a method of measuring and managing performance of the bank under financial measure.

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.. Performance Measurement System in Indian Banking Sector in Camel Framework

References
Bodla, B.S.; and Verma, R. (2006), Evaluating Performance of Banks through CAMEL Model: A Case Study of SBI and ICICI, The ICFAI Journal of Bank Management, Vol.5, No.3, pp. 49-63. Joshi and Joshi (2002), Managing Indian Banks: The Challenges Ahead, Second Edition, Response Books, A Division of Sage Publications- New Delhi, pp.109-110. Satish, D.; Jutur, S.; and Surender, V. (2005), Indian Banking Performance and Development 2004-05, Chartered Financial Analyst, Special Issue, October, pp.6-29. Satish, D.; and Bharathi, Y. Bala (2006), Indian Banking Coming of Age Performance Snapshot 2005-2006, Charted Financial Analyst, Special Issue, October, pp.6-30. Sisodiya, A. S.; Bharathi, Y. Bala.; and Kavitha, P. (2007), Indian Banking Sector of Performance, Progress and Challenges, Chartered Financial Analyst, Special Issue, October, pp.26-56. Sisodiya, A. S.; Bharathi, Y. Bala.; and Moghal, I. (2008), Indian Banking Industry: Sustaining the Growth Momentum, Chartered Financial Analyst, Special Issue, October, pp.34-61. Sisodiya, A. S.; and Pemmaraju, R. (2009), Indian Banking Sector: Signs of Resilience, Chartered Financial Analyst, Special Issue, October, pp.26-52.

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