The rating is based upon five critical elements of a credit union's operations: capital adequacy, asset quality, management, earnings and asset/liability management. This rating system is designed to take into account and reflect all significant financial and operational factors examiners assess in their evaluation of a credit union's performance. Credit unions are rated using a combination of financial ratios and examiner judgment.
CAMELS RATING SYSTEM METHODLOGY
In 1994, the RBI established the Board of Financial Supervision (BFS), which operates as a unit of the RBI. The entire supervisory mechanism was realigned to suit the changing needs of a strong and stable financial system. The supervisory jurisdiction of the BFS was slowly extended to the entire financial system barring the capital market institutions and the insurance sector. Its mandate is to strengthen supervision of the financial system by integrating oversight of the activities of financial services firms. The BFS has also established a sub-committee to routinely examine auditing practices, quality, and coverage.
In addition to the normal on-site inspections, Reserve Bank of India also conducts off-site surveillance which particularly focuses on the risk profile of the supervised entity. The Off-site Monitoring and Surveillance System (OSMOS) were introduced in 1995 as an additional tool for supervision of commercial banks. It was introduced with the aim to supplement the on-site inspections. Under off-site system, 12 returns (called DSB returns) are called from the financial institutions, which focus on supervisory concerns such as capital adequacy, asset quality, large credits and concentrations, connected lending, earnings and risk exposures (viz. currency, liquidity and interest rate risks).
In 1995, RBI had set up a working group under the chairmanship of Shri S. Padmanabhan to review the banking supervision system. The Committee certain recommendations and based on such suggestions a rating system for domestic and foreign banks based on the international CAMELS model combining financial management and systems and control elements was introduced for the inspection cycle commencing from July 1998. It recommended that the banks should be rated on a five point scale (A to E) based on the lines of international CAMELS rating model. CAMELS evaluate banks on the following six parameters:-
(a) Capital Adequacy: Capital adequacy is measured by the ratio of capital to risk-weighted assets (CRAR). A sound capital base strengthens confidence of depositors
(b) Asset Quality: One of the indicators for asset quality is the ratio of non-performing loans to total loans (GNPA). The gross non-performing loans to gross advances ratio is more indicative of the quality of credit decisions made by bankers. Higher GNPA is indicative of poor credit decision-making.
(c) Management: The ratio of non-interest expenditures to total assets (MGNT) can be one of the measures to assess the working of the management. . This variable, which includes a variety of expenses, such as payroll, workers compensation and training investment, reflects the management policy stance.
(d) Earnings: It can be measured as the return on asset ratio.
(e) Liquidity: Cash maintained by the banks and balances with central bank, to total asset ratio (LQD) is an indicator of bank's liquidity. In general, banks with a larger volume of liquid assets are perceived safe, since these assets would allow banks to meet unexpected withdrawals.
(f) Systems and Control
Each of the above six parameters are weighted on a scale of 1 to 100 and contains number of sub-parameters with individual weight ages.
Rating Symbol
Rating symbol indicates
A
Bank is sound in every respect
B
Bank is fundamentally sound but with moderate weaknesses
C
Financial, operational or compliance weaknesses that give cause for supervisory concern.
D
serious or immoderate finance, operational and managerial weaknesses that could impair future viability
E
Critical financial weaknesses and there is high possibility of failure in the near future.
INDUSIND BANK CAMELS SYSTEM
CAPITAL ADEQUACY
The bank has been able to maintain its CAR ratio well over the stipulated 9% level and has requisite head room to raise capital when required for fuelling further growth. In June 2008, IndusInd raised Rs 2.2bn equity through a Global depository receipts issue. The bank's Tier 1 ratio improved from 6.7% in FY08 to 7.6% in FY09 following the issue.
ASSETS QUALITY
IndusInd Bank raises Rs. 420 crore through Tier-II bond issue:
IndusInd Bank has successfully concluded its Tier-II bond issue on March 30, 2010. It mobilized on a private placement basis an amount of Rs. 420 crore inclusive of the green shoe option. These bonds were assigned "AA-" rating (Double A minus) by CARE Ratings indicating high safety for timely servicing of debt obligation and low credit risk. An in- principle approval has already been obtained from NSE for listing and trading in these securities.
These bonds with FV of Rs 10.00 lacs each carry an interest coupon of 9.50% per annum. The bonds will be due for redemption after 63 months of issue.
The Bond issue has augmented the long term resources and further strengthened the Capital Adequacy Ratio of the Bank.
MANAGEMENT
We measure the productivity of the bank based on the trend of its cost to revenue and revenue per employee. On the productivity side, IndusInd bank is in the process of managing cost through rationalization of vendors, renegotiation of procurement and a scrutiny of charges. Centralization of branches has also helped the bank redeploy excess manpower. A large element of variable cost comes from manpower. In order to motivate the staff to improve productivity, the new slogan coined by the management is "Earn more, take home more". Further in order to attract and retain talent, the bank has realigned its remuneration structure to be at par with the best in the industry.
EFFICIENCY AND PERFORMANCE
Another key measure is the profitability of the bank which is based on the trend of its Return on assets (RoA), book value and ROE. ROA The bank has witnessed strong increase in its ROA during FY09 on the back of renewed focus on reduction in costs which are witnessing a decline as well as constant asset growth.
Book Value
The book value of IndusInd bank has been seeing a rising trend. On a price to adjusted book value the stock is trading at 1.5x its FY11E adjusted book value of Rs. 55.
ROE
The bank's ROE has witnessed a healthy rise during FY09 on account of considerable profit growth, stable net worth and moderate asset growth.
LIQUIDITY
IndusInd bank during FY09 did not face any liquidity pressures when the entire banking system was experiencing liquidity crisis. IndusInd bank was liquid to the extent of nearly Rs.10 bn in October and November 2008.
Financial result highlights
Q1 FY10 Results Update
The bank recorded a robust net interest income rise of 80% on a y-o-y basis as against the corresponding quarter in the previous year mainly on the back of a sharp rise in interest on advances growth of 25.4% on a y-o-y basis. NIM grew from 1.7% in Q1 FY09 to 2.6% in Q1 FY10 mainly on the back of rise in the yield on advances from 12.4% in Q1FY09 to 13.4% in Q1FY10 and containment in cost of deposits from 7.8% in Q1 FY09 to 7.7% in Q1FY10. The bank has been able to contain its interest expenses growth to 8.5% on a y-o-y basis. The interest expenses growth has been low as the bank has been trying to reduce its bulk deposits proportion of total deposits. One of the important components of the bank - the other income grew by 166.1% y-o-y basis. The core fee income grew by 34% from Rs. 580.6 mn in Q1 FY09 to Rs. 766.3 mn in Q1 FY10. The asset quality of the Indusind Bank Limited bank improved to 1.5% in Q1 FY10 from a high of 3.2% in Q1 FY09 mainly on the management's commitment of cleaning up the balance sheet of the stressed assets through adequate provisioning, write off and cash recovery.
FY09 Results Update
The bank delivered results better than their own estimates on most of the parameters the bank measures its performance namely, improved ROA, improved asset quality, better margins, lower cost to income etc. The bank improved its interest income and margins mainly through a comfortable rise in the interest income growth as well as an improvement in the yield of advances.
SYSTEM AND CONTROL
Generation of Accurate and Faster MIS Reports
Generation of MIS reports is now a pleasure and done in a matter of minutes because of centralization. Earlier, reports used to be physically compiled at the branches. After being e-mailed to the central office, these reports had to be re-compiled and cross-checked for accuracy, which used to take a number of days. Raman added that the reports are timely and much more accurate now, which is helping tremendously in business decisions, audit and overall banking operations.
"IT management has become very simple. We are saving a great deal in terms of manpower because local IT skills and labor are not needed at the branches. The troubleshooting, if any, is done centrally. Providing access to new users at new branch locations is done in minutes, and online guidance is provided through session shadowing. Single-point delivery enables the fast rollout of new applications for launching new banking products, and enhancement of existing applications with new features."
FEDERAL BANK CAMELS SYSTEM
CAPITAL ADEQUACY
The Net Worth of the Bank increased to Rs. 4536 Crores as on 30.09.2009, from Rs. 4108 Crores as on 30.09.2008. The Capital Adequacy (CRAR) of the Bank, computed as per Basle 1 guidelines, stands at 17.91 % as on 30.09.2009, against the regulatory minimum of 9 %. The CRAR as per Basle 2 guidelines works out to 18.47 %. The Tier-1 (core CRAR) capital is at 15.75 % as per Basle 1 and 16.98 % as per Basle 2. Bank holds Rs. 189.72 Crore in Investment Fluctuation Reserve.
ASSET QUALITY
The Bank had a Gross NPA of 2.99 % and Net NPA of 0.54 % as on 30.09.2009, as against 2.62 % and 0.40 % respectively as at the end of September 2008. The Provision Coverage Ratio (total provisions held against non-performing advances, expressed as a percentage of gross NPAs) amounted to 81.73 % at the end of the second quarter of FY 2009-10, as against the minimum of 70 % suggested in the Monetary Policy of RBI issued this week. During the first half-year, assets from 168 accounts worth Rs. 396 crore were restructured.
MANAGEMENT
Encouraging and rewarding professional integrity in all aspects of the Bank, including in its business enterprise and its dealings with customers, shareholders, governmental organizations, and others.s
Providing a mechanism to facilitate reporting of fraudulent behavior or other deviations from the Bank's policies and procedures to senior management without fear of reprisal or alienation for making such a report.
Maintaining the confidentiality of certain information obtained during the course of employment with the Bank. This includes ensuring that confidential information regarding customers, employees, suppliers, and security operations is communicated to other Bank representatives on a "need to know" basis only and is used solely for the Bank's purposes and not as a basis for making a profit or furthering a private interest.
Not engaging in any conduct or transaction that conflicts with the interests of the Bank. Specifically, an Executive Manager shall not accept a directorship of another corporation without approval of the Bank's Board of Directors or its Executive Committee. Further, no Executive Manager will represent the Bank in any transaction with respect to which that Manager has any material connection or substantial financial interest. Without limiting the scope of the terms, a "material connection" includes the involvement of any family member or close personal friend; and "substantial financial interest" includes: (1) ownership of ten percent (10%) or more of the outstanding stock of a corporation; (2) any interest in a partnership; or (3) receipt of salary or other payments for services rendered from any organization.
Refraining from engaging in activities outside working hours, including other employment, that interfere with job performance or compromise the reputation of the Bank as a trusted financial institution.
Abiding by the provisions of the Federal Bank Bribery Law, prohibiting solicitation or receipt of anything of value with intent to be influenced or rewarded in connection with any transaction or business of the Bank.
EFFICIENCY AND PERFORMANCE
The Federal bank certainly makes large profits. According to the Board's 1995 Annual Report, the System had net income totaling $23.9 billion, which, if it were a single firm, would qualify it as one of the most profitable companies in the world. How were these profits distributed? By an agreement between the Board of Governors and the Treasury, nearly all of the Fed's annual profits are paid to the federal government. Accordingly, a lion's share of $23.4 billion, which represents 97.9 percent of the Federal Reserve's net income, was transferred to the Treasury. The Federal Reserve Banks kept $283 million, and the remaining $231 million was paid to its stockholders as dividends.
Savings Bank reported net earnings of $1.4 million, or 78 cents per share, for the nine months ended Sept. 30, 1995, as compared to $1.9 million, or $1.03 per share, for the nine months ended Sept. 30, 1994, a decrease of $461,000, or 24.8 percent.
LIQUIDITY
Total business of the Bank reached Rs. 59218 Crore, showing an increase of 24 % from the corresponding period of the previous fiscal. Total deposits increased by 26.52 % from Rs. 26430 Crore as on 30.09.2008 to Rs. 33439 Crore as on 30.09.2009. Net Advances went up by 20.88 % to Rs. 25779 Crore as on 30th September 2009 from Rs.21326 Crore as on 30th September 2008. This growth was contributed by retail, SME and corporate advances. The retail advances of the Bank grew by 14.8 % on y-o-y basis and reached Rs. 7746 Cr forming 29 % of the gross advances. The advance to priority sector was at Rs. 9983 Crore as on 30thSeptember, the share of priority sector lending being 44.59 % of Net Bank Credit. Lending to Agriculture sector was at Rs. 2594.64 Crore as on 30.09.2009.
SYSTEM AND CONTROL
Conducting the nation's monetary policy by influencing monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates.
Supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system, and protect the credit rights of consumers.
Maintaining stability of the financial system and containing systemic risk that may arise in financial markets.
Providing financial services to depository institutions, the Indian government, and foreign official institutions, including playing a major role in operating the nation's payments system.
CONCLUSION:
In the camel analysis, the Bank has taken up the following roles:
Originator: The Bank disburses the credit, after detailed appraisal. The individual accounts are repacked into a pool for transferring credit risk to the third party. The Bank has securitized its Commercial vehicles, Utility vehicles, Car Loans and Construction Equipment exposures. The securitized tranches have been assigned highest credit quality rating AAA (SO) and equivalent by the rating agencies reflecting superior quality of the underlying assets.
Investor: Investing in the securitized pool originated by the other Bank/FIs, having highest credit quality for the purpose of Balance sheet management and diversifying credit profile.
Servicer: The Bank acts as a servicer when loans which were originated by the Bank are used as underlying assets in securitization. As the exposures are booked by the Bank, it emphasizes on continuing and enriching the relationship with the clients.
Provider of Credit enhancement: To manage the issue of delinquencies in the underlying assets by effectively addressing the repayment obligation, under the transaction, of the investors.
Provider of Liquidity facilities: To bridge the timing gap in collection of recoveries from the underlying pool and transferring the cash flows, as per the schedule, to the investors.
