Performance Evaluation of Public Sector Banks and Foreign Banks in India Using CAMEL Model

Abstract

Performance is the buzz word in new economic regimes. The study examinesand compares the performance of public and foreign sector banks operatinginside India during the years 2001-2010. It uses the CAMEL methodology based onstandard factors such as capital adequacy, asset quality, management capability, earningand profitability and liquidity position. The financial data for the study has been minedfrom the performance highlights of public sector and foreign sector banks published byIndian Banks Association (IBA). A sample of five public sector banks and five foreignbanks have been selected to measure and compare their performance. Main findings ofthe study are that foreign banks perform better in terms of asset quality, asset utilization,while the public sector banks have higher total advances to total asset ratio and totalexpenditure to total income ratio an indicator lower management efficiency. Indianpublic banks are consistently heading to achieve higher standards and adopting world‟sbest management practices. The main objectives of the study are (a) To compare thefinancial performance of the banks under study (b) To determine the factors responsiblefor current financial performance and to suggest measures for improvement of financialperformance of banks. In this study, the CAMEL Model used to estimate the financialperformance of banks. This system was adopted in India since 1997, this systemconsists - Capital adequacy, Asset quality, Management capability, Earnings capacity,and Liquidity. CAMEL ratios are mostly used to quantify the financial soundness andhealth of banks through micro analysis of balance sheets and income statement items.These ratios include various financial indicators regarding quality of assets, financialsoundness and management quality, earning capacity of assets, liquidity position andrisk taking behavior of banks. Therefore, the efficiency/inefficiency of sample banksevaluated in relation to the CAMEL indicators.

Key words: Financial performance, CAMEL ratios, India, Public banks, Foreign banks