A CAMELS Analysis of the Indian Banking Industry

Abstract

The banking sector has undergone a complex, but comprehensive phase of restructuring since 1991, with a view to make it sound, efficient, and at the same time forging its links firmly with the real sector for promotion of savings, investment and growth. Some improvement in the Indian banking sector has been seen after the reforms. A natural framework to analyse this improvement is the CAMELS framework, under which banks are required to enhance capital adequacy, strengthen asset quality, improve management, increase earnings and reduce sensitivity to various financial risks. The present study compares the performance of public sector banks with private/foreign banks under the CAMELS framework. The data used for the study were the audited financial statements of a sample of Indian banks over the last five financial years. The results of the study show that private/foreign banks fared better than public sector banks on most of the CAMELS factors in the study period. The two contributing factors for the better performance of private/foreign banks were Management Soundness and Earnings and Profitability.