The financial stability of the banking sector: An empirical investigation using the CAMEL rating approach

Download This Article

This work is licensed under a Creative Commons Attribution 4.0 International License.

Abstract

The study compares the CAMEL ratings of five central Indian commercial banks over 12 years (2011–2022). The findings indicate that most banks received a rating of 1, with an average capital adequacy ratio (CAR) of 15.18 percent. Maintaining low non-performing loan (NPL) rates is a priority for Indian banks, as reflected in the average of 1.98 percent with a grade of 2. The research concludes that these banks are well-managed, showcasing an average operational efficiency/income ratio of 40 percent (rated 3), signifying good managerial efficiency. This suggests banks can meet short-term customer commitments and withdrawals adequately. Notably, State Bank of India (SBI) and Punjab National Bank (PNB) received a grade of 2, while Axis Bank, Industrial Credit and Investment Corporation of India (ICICI) Bank, and Housing Development Finance Corporation (HDFC) Bank scored a rating of 1. The study indicates that private sector banks outperform their public sector counterparts across all CAMEL model parameters, showcasing more robust performance metrics. The paper advises Indian banks to invest in the long run, watch their risks, and aim for steady growth and profit. The study emphasises the importance of capital, assets, and management for a healthy banking system, suggesting improvements in earnings and liquidity management for overall stability and growth.

Keywords: Capital Adequacy, Asset Quality, Return on Assets, Liquidity, Composite CAMEL Rating

Authors’ individual contribution: Conceptualisation — F.A.; Methodology — F.A.; Resources — B.I.; Writing — Original Draft — F.A.; Writing — Review & Editing — F.A.; Supervision — M.S.A.; Funding Acquisition — L.S.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G21, G24, G28

Received: 01.09.2023
Accepted: 19.04.2024
Published online: 23.04.2024

How to cite this paper: Sami, L., Anjum, F., Ansari, M. S., & Iffat, B. (2024). The financial stability of the banking sector: An empirical investigation using the CAMEL rating approach. Journal of Governance & Regulation, 13(2), 135–144. https://doi.org/10.22495/jgrv13i2art13