How Banks are Rated in India?

The first step towards rating of banks in India was taken up in 1995, when the Reserve Bank of India established the S Padmanabhan Committee to take a fresh look at the banking Supervision.

S Padmanabhan Committee recommended that Banking supervision should focus on the parameters of the Financial Soundness, Managerial and Operational Efficiency and firmness. The Padmanabhan Committee recommended 5 points rating, which was based upon the CAMELS Model.

What is CAMELS Rating ?

CAMELS ratings is a Banks rating used in United States. The 6 alphabets in CAMELS denote the following:

  1. C :             Capital Adequacy Ratio
  2. A:             Asset Quality
  3. M:             Management Effectiveness
  4. E:             Earning (profitability)
  5. L :             Liquidity (using the ALM Asset Liability Mismatch Considerations)
  6. S:             Sensitivity to market risk

What is Padmanabhan Committee Rating?

The Padmanabhan Committee recommended the following ratings:

A:  

Fundamentally sound in every aspect  

B:  

Fundamentally sound but with moderate weakness 

C:  

Financial, Operational and / or compliance weakness and raises supervisory concerns.

D :  

Serious or moderate Financial , operational and / or managerial weaknesses that could impair the future viability.  

E:  

Critical Financial Weakness that has the possibility of failure  

 

Internal rating: Latest Developments:

In May 2010, the RBI has told the banks that they should be ready with a new methodology of internal rating of Capital Requirement. This is called Advanced Internal Rating Based (AIRB) approach. As of now the banks had been following the standardized approach, wherein banks assign risk to the asset based on the rating given by external rating agencies. This makes the banks a step closer to becoming Basel II compliant institution.

  • Since the minimum CAR required is 9%, it is low for the borrowers with best rating and higher for lower rating. RBI now wants banks to develop their own methodology to rate borrowers rather than rely on external agencies.

6 Comments

  1. dinesh

    September 4, 2011 at 10:43 pm

    plz tell me what a main difference in CAR and CRR

    Reply
    • anuj

      December 3, 2014 at 11:22 pm

      look dont get confuse in these two coz these two are so d/f crr is amt a bank have to keep with rbi and car is a ratio witch show capability of a bank to absorb losses[npa]

      Reply
  2. kirti

    January 12, 2013 at 6:20 am

    crr is cash reserve ratio

    Reply
  3. sunil kumar suman

    August 6, 2013 at 8:49 pm

    please explain tobin tax and robbin hood tax

    Reply
  4. tina

    December 28, 2013 at 10:49 pm

    sir,what is the difference b/w CAR and CRAR

    Reply
  5. ASHIT KUMAR RAJA

    January 13, 2014 at 2:41 am

    A means of taxing spot currency conversions that was originally suggested by American economist James Tobin (1918-2002). The Tobin tax was developed with the intention of penalizing short-term currency speculation, and to place a tax on all spot conversions of currency. Rather than a consumption tax paid by consumers, the Tobin tax was meant to apply to financial sector participants as a means of controlling the stability of a given country’s currency.

    Reply

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