ADALYA JOURNAL ISSN NO: 1301-2746 Comparison of Operational Efficiency of Listed Banks from Kerala – A Study Based on CAMEL Analysis Aarya S1, Dr Vineeth KM2 #Post Graduate Department of Commerce, Government College, Tripunithura, Kerala 682301 [email protected] [email protected] Abstract - The performance of banks has been an issue of major interest for various stakeholders such as depositors, regulators, customers and investors. Efforts have been made from time to time, to measure the financial position of each bank and manage it efficiently and effectively. In this study, ratios according to CAMEL system are applied for analyzing the performance of all the three listed banks in Kerala. This study has been conducted to examine financial performance of three listed banks in Kerala during 2018- 2019. This study is based on measuring performance of banks with respect to CAMEL model and shows that federal bank shows the best performance comparing to South Indian Bank and Dhanlaxmi Bank. Keywords - CAMEL Analysis, Commercial Banks, Financial Performance, Operational Efficiency I. INTRODUCTION Bank is a financial institution that contributes towards the development of an economy and it is treated as an important service industry. They are the pillars of an economy. It plays an important role in distributing the money for the development of trade, industry and commerce. Nowadays functions of bank are not limited to within the geographical limit of a country. They provide various services such as account facility, ATM facility, loan facility, mutual fund facility and many other financial services. These services facilitate the work life and private life of people. Banking in its modern sense evolved in the 14th century in the prosperous cities of Italy but it took the ideas and concepts of credit and lending that had their roots in the ancient world. In India the banking sector is witnessed various changes after liberalization and globalization. Globalization paved way for many banks to enter in India and has resulted in tough competition for the existing banks in the country. In India few public and few private sector banks were operating since conceptualization of this sector but now they have to face severe competition from the foreign banks to sustain in the market and consequently many amendments were made by these domestic players to attract customers. The customers are interested in making relations with domestic banks because they can easily rely on these banks and can undoubtedly make transactions with them. This helps in the sustainment of domestic banks. Due to this reason, though the foreign banks have stepped into our country they are not well established. The present generation is open minded in terms of new change and want to avail new facilities offered by foreign banks therefore they prefer the foreign banks over domestic banks and now gradually the way of foreign banks is becoming easier in India. The performance of banks has been an issue of major interest for various stakeholders such as depositors, regulators, customers and investors. Efforts have been made from time to time, to measure the financial position of each bank and manage it efficiently and effectively. In this study, ratios according to CAMEL system are applied for analyzing the performance of all the three listed banks in Kerala. Volome 8, Issue 8, August 2019 625 http://adalyajournal.com/ ADALYA JOURNAL ISSN NO: 1301-2746 II. OBJECTIVES To find out how capital adequacy, asset quality, management soundness, earnings and profitability, liquidity affect the performance of the bank, To analyze the bank’s performance through CAMEL model III. STATEMENT OF THE PROBLEM Performance and efficiency of banks are the key elements of efficiency and efficacy of countries’ financial system. The broad objective of the banking sector reforms in India has been to increase efficiency and profitability of the banks. Prior to banking reforms, the industry was a near monopoly dominated by public sector banks. However, the banking reforms bring greater autonomy and a number of private and foreign banks are able to extend their market. Operational efficiency is an indicator, which will help not only the public but to the management, regulators, and supervisors to understand and judge the relative efficiency of the players competing in the banking sector. Therefore, this study attempts to apply CAMEL model on the three listed banks in Kerala in order to compare their efficiency and solvency position. IV. RESEARCH METHODOLOGY Period of the study: Data for the study has been collected from 2 years, 2018 & 2019 Area of study: The study has been done in the listed banks from Kerala for a period from 2017-2018 to 2018-2019. Sources of data: Analysis and interpretation has been given based on data’s collected from secondary sources. Tools used for the study: Ratio analysis and percentage analysis were used for analysis. V. REVIEW OF LITERATURE Jagjeet Kaur, Dr.Harsh Vineet Kaur (2016) studied “Camel analysis of selected public sector banks ”. In this project an analysis has been made to evaluate the financial performance of public sector commercial banks in India. The study considered a sample of 10 public sector banks in India and their performance for period of 2005-2014. The results show that Bank of Baroda and PNB are considered the most stable banks; Indian bank and IDBI bank, Canara bank & SBI are considered average, and the Union Bank, Bank of India, Syndicate bank & CBI are considered below average and are closely monitored to ensure their viability. Sufian Fadzlan, (2012) studied “An analysis of internal and external factors that influences the performance of banks operating in the Indian banking sector’ during the period 2000-2008. The empirical findings from this study suggest that credit risk, operating expenses, liquidity and size have statistically significant impact on the profitability of Indian banks. However, the impact is not uniform across banks of different nations of origin. VI. RESULTS I. CAPITAL ADEQUACY Capital base of financial institutions facilitates depositors in forming their risk perception about the organization. Also, it is a significant stricture for financial managers to maintain adequate levels of capitalization. Capital adequacy is very useful for a bank to conserve & protect stakeholders confidence and prevent the bank from bankruptcy. Reserve Bank of India prescribes banks to maintain a minimum Capital to risk-weighted Assets Ratio (CRAR) of 9 % with regard to credit risk, market risk and operational risk on an ongoing basis, as against 8 % prescribed in Basel documents. For the study, the following ratios have been used to measure capital adequacy: Volome 8, Issue 8, August 2019 626 http://adalyajournal.com/ ADALYA JOURNAL ISSN NO: 1301-2746 1. Capital adequacy 2. Debt equity 3. Coverage ratio 4. Advances to total assets The following is the analysis of the various ratios used to measure capital adequacy. Table 1 : CAMEL RATING (2018-2019) CAPITAL ADEQUACY Capital Coverage Advances to Debt Equity Group rank Adequacy Ratio Total assets Bank Avg Rank Avg Rank Avg Rank Avg Rank Avg Rank Federal Bank 14.42 1 10.44 1 1.395 1 68.11 1 23.59 2 South Indian 12.65 2 15.25 3 1.32 2 66.95 2 24.04 1 Bank Dhanlaxmi 13.81 3 14.64 2 1.19 3 51.51 3 20.28 3 Bank Source: Researchers’ Computations On the basis of group averages of four sub-parameters of capital adequacy, South Indian Bank was at the top position with group average of 24.04, followed by federal bank(23.50). Dhanlaxmi Bank stood at the last position due to its poor performance in CAR, Advances to total assets and also due to less coverage ratio. II. ASSET QUALITY Asset quality covers an institutional loan’s quality, which reflects the earnings of the institution. Asset quality determines the healthiness of financial institutions against loss of value in the assets as asset impairment risks the solvency of the financial institutions.The weakening value of assets has a spillover effect, as losses are eventually written-off against capital, which eventually expose the earning capacity of the institution. With this framework, the asset quality is assessed with respect to the level and severity of non-performing assets, adequacy of provisions, distribution of assets etc. For the study, the following ratios have been used to measure asset quality: 1. Net NPA to net assets 2. Net NPA to total advances 3. Total investment to total assets 4. Gross NPA to total advances The following is the analysis of the various ratios used to measure asset quality TABLE 2: CAMEL RATINGS (2018-2019) ASSET QUALITY Total Gross NPA Net NPA Net NPA to % change Investment to Group to Total in to Total Rank Net Assets Advances NPA Total Assets Advances Bank Avg Rank Avg Rank Avg Rank Avg Rank Avg Rank Avg Rank Federal Bank 1.05 1 1.55 1 21.05 1 2.95 1 4.78 1 6.28 2 South Indian 1.85 3 2.51 2 21.52 2 3.51 2 0.85 2 6.04 1 Bank Dhanlaxmi 1.35 2 2.8 3 34.51 3 7.71 3 -0.78 3 9.11 3 Bank Source: Researchers’ Computations Volome 8, Issue 8, August 2019 627 http://adalyajournal.com/ ADALYA JOURNAL ISSN NO: 1301-2746 On the basis of group averages of sub-parameters of assets quality, South Indian Bank had the highest group average, followed by federal bank. Dhanlaxmi Bank was positioned last in terms of assets quality. III.MANAGEMENT EFFICIENCY Management efficiency, another indispensable component of the CAMEL framework, means adherence to set norms, knack to plan and be proactive in the dynamic environment, leadership, innovativeness and administrative competence of the bank.