Title: Evaluating Performance of Bank Through CAMEL Model Description: The acronym CAMEL stands for C- Capital Adequacy

A-Assets Quality M- Management Efficiency E- Earning Quality L- Liquidity

Capital Adequacy It is important for a bank to maintain depositors confidence and preventing the bank from going bankrupt. Capital adequacy reflects the overall financial condition of the banks and also the ability of the management to meet the need for additional capital. It also indicates whether the bank has enough capital to absorb unexpected losses. Capital adequacy ratios act as indicators of bank leverage. The following ratios measure Capital Adequacy: Capital Adequacy Ratio Debt-Equity Ratio Advances to Assets

Government Securities to Total Investments Assets Quality The quality of assets is an important parameter to gauge the strength of the bank. 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 type 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: Gross NPAs to Net Advances Net NPAs to Net Advances Total Investments to Total Assets Ratio Net NPAs to Total Assets Management Efficiency Management efficiency is another important element of the CAMEL model. The ratios in this segment involve subjective analysis to measure the efficiency and effectiveness of the management. The management of the bank takes crucial decisions depending on its 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:

Total Advances to Total Deposits Business Per Employee Profit Per Employee Earning Quality The quality of earnings 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 banks. 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 a banks income is earned through non-core activities like investments, treasury operations, corporate advisory services and so on. The following ratios try to assess the quality of income in terms of income generated by core activity-income from lending operations: Operating Profits to Average Working Funds Ratio Net Interest Margin to Total Assets Net Profit to Average Assets Interest Income to Total Income Non-Interest Income to Total Income Liquidity Liquidity is very important for any organization dealing with money. 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. The ratios suggested to measure liquidity under CAMEL model are as follows: Liquid Assets to Total Assets Government Securities to Total Assets Liquid Assets to Demand Deposits Liquid Assets to Total Deposits Calculation: Capital Adequacy: Advances to Assets: This is the ratio of Total Advances to Total Assets. This Ratio indicates banks aggressiveness in lending which ultimately results in better profitability. Higher ratio of advances/deposits(assets) is preferred to a lower one. Total advances also include receivables. The value of Total assets is excluding the revaluation of all the assets. Advances to Assets of Tamilnad Mercantile Bank for the period of 31-mar-2006 to 31-mar-2011 are as follows:(in Rs.) Requir ements As on 31marAs on 31marAs on 31marAs on 31marAs on 31marAs on 31mar-

2011 Total Advanc es Total Assets

2010

2009

2008 53320 00000 0 80215 18987 0 66.47 %

2007 40470 00000 0 67369 42675 0 60.07 %

2006 31260 00000 0 60592 81437 0 51.59 %

108710 828800 65710 000000 00000 00000 0 144195 119824 99476 402300 675300 82119 0 (Total 75.39 69.16 66.05 % % Advanc % es/Total Assets) Interpretation:

Here, we see that the Tamilnad Mercantile Bank has maintaining the increasing in percentage of Advances to Assets for the last 6 years. Higher ratio of Advances/Deposits is preferred to a lower one. Assets Quality: Gross NPAs to Net Advances: It is a measure of the quality on assets in a situation, where the management has not provided for loss on NPAs. Here the Gross NPAs are measured as a percentage of Net Advances. Gross NPAs to Net Advances of Tamilnad Mercantile Bank for the period of 31-mar-2006 to 31-mar-2011 are as follows:(in Rs.)

Requirements As on 31-mar-2011 Gross NPA Net Advance (Gross NPA/Net Advance) Interpretation: 1413230000

As on As on As on 31-mar-2010 31-mar-2009 31-mar-2 1150000000 1204000000

11997000

108710000000 82880000000 65710000000 53320000 1.3% 1.37% 1.83% 2.25%

A ratio of below 1% is considered as a tolerable limit. The lower the ratio, the better the quality of advances. Net NPAs to Net Advances: It is most standard measure of assets quality. In this ratio, Net NPAs are measured as a percentage of Net Advances. Net NPAs to Net Advances of Tamilnad Mercantile Bank for the period of 31-mar-2006 to 31-mar-2011 are as follows:(in Rs.) Requirements As on 31-mar-2011 Net NPA Net Advance 2935170000

As on As on As on 31-mar-2010 31-mar-2009 31-mar-2 199800000 220800000

20261600

108710000000 82880000000 65710000000 53320000

(Net NPA/Net 0.27% Advance)

0.24%

0.33%

0.38%

Interpretation: Higher the ratio reflects rising bad quality of loans. Net NPAs to Total Assets: This ration indicates the efficiency of the bank in assessing credit risk and, to an extent, recovering the debts. This ratio is arrived by dividing the Net NPAs by Total Assets.


Net NPAs to Total Assets of Tamilnad Mercantile Bank for the period of 31-mar-2006 to 31-mar-2011 are as follows:(in Rs.) Requirements As on As on 31-mar-2011 31-mar-2010 2935170000 199800000 Net NPA Total Asset (Net NPA/Total Asset) Interpretation: Lower the ratio, better is the performance of the bank.

As on As on 31-mar-2009 31-mar-2 220800000 20261600

14419540230 119824675300 99476821190 80215189 0.0203% 0.16% 0.22% 0.25%

Management Efficiency: Total Advances to Total Deposits: This ratio measures the efficiency and ability of the banks management in converting the deposits available with the bank(excluding other funds like equity capital, etc.,) into high earning advances. Total Advances to Total Deposits of Tamilnad Mercantile Bank for the period of 31-mar-2006 to 31-mar-2011 are as follows:(in Rs.) Requirements As on As on As on 31-mar-2011 31-mar-2010 31-mar-2009 Total Advances 108710000000 116390000000 95660000000 Total Deposits

As on 31-m 7670

138080000000 116390000000 161370000000 1300 71.2% 68.69%

78.72% (Total Advances/Total Deposits) Interpretation:

69.51

Higher the ratio, better is the efficiency of the banks management. Business Per Employee: This ratio shows the productivity of human forces of the bank. It is used as a tool to measure 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.

Business Per Employee of Tamilnad Mercantile Bank for the period of 31-mar-2006 to 31-mar-2011 are as follows:(in Rs.) Requirements As on 31-mar-2011 As on 31-mar-2010 As on 31-mar-2009

As on 31-ma

Total Business 246790000000 199270000000 161370000000 13002 Total Number 2573 of employee 95915274 (Total Business/Total Number of Employee) Interpretation: The improvement was due to business growth outpacing that in manpower. Profit Per Employee: This ratio shows the surplus earned per employee. It is arrived at by dividing the Profit After Tax earned by the bank by the total number of employees. Profit Per Employee of Tamilnad Mercantile Bank for the period of 31-mar-2006 to 31-mar-2011 are as follows:(in Rs.) Requirements As on 31-mar2011 As on 31-mar2010 As on 31-mar2009 As on 31-mar2008 2290 87017467.25 2377 67888094.24 2399

54197

Profit Tax

after 2549843300 1864060000 1528411000 1273869000

Total number 2573 of employee

2290

2377

2399

991000.1166 814000 (PAT/Total number of employee) Interpretation:

643000

531000

Higher the number of employees, the better is the efficiency of the management. Earning Quality: Operating Profits to Average Working Funds Ratio: This ratio indicates of 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 profits by average working funds. Average Workings are the total resources(total assets or total liabilities) employed by a bank. Operating Profits to Average Working Funds Ratio of Tamilnad Mercantile Bank for the period of 31-mar-2006 to 31-mar-2011 are as follows:(in Rs.) Requir As on ements 31mar2011 As on 31mar2010 As on 31mar2009 As on 31mar2008 As on 31mar2007 As on 31mar2006

Operat ing Profit Total Asset

434210 315900 26527 0000 0000 00000

22439 23120 00000 00000 80215 18987 0 2.79% 67369 42675 0 3.43%

19891 00000 60592 81437 0 3.28%

144195 119824 99476 402300 675300 82119 0 (Opera 3.01% 2.63% 2.66% ting Profit/ Total Asset) Interpretation:

Higher the ratio, the better it is i.e., the bank has the ability to earn consistently, going into the future and the better utilization of funds will result in higher operating profits. Net Profit to Average Assets: This ratio indicates the efficiency of the banks in utilizing their assets in generating profits. 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. Net Profit to Average Assets of Tamilnad Mercantile Bank for the period of 31-mar-2006 to 31-mar-2011 are as follows:(in Rs.) Requir As on ements 31mar2011 As on 31mar2010 As on 31mar2009 As on 31mar2008 As on 31mar2007 As on 31mar2006

Net Profit Averag e Assets (Net Profit/ Averag e Assets)

250900 0000 132010 038800 1.90%

184530 0000 109650 748200 1.68%

15021 00000 89846 00553 0 1.67%

12674 00000 73792 30831 0 1.71%

10577 00000 63981 12056 0 1.65%

10119 00000 58306 61127 0 1.73%

Interpretation: A higher ratio indicates the better income generating capacity of the assets and better efficiency of the management and also the better earning potential in the future.