Through its annual process of financial inspection, the Reserve Bank of India (RBI) inspects and supervises commercial banks and non-banking finance companies (NBFCs) every year. It also gives a rating to banks and NBFCs, but the results remain out of public domain. Known as the CAMELS rating, the process has been on since late 1990s. The ratings are from A through E in ascending order where A is the best and E the worst. However, an institution is monitored closely only if the grading is C or below.
What is camels?
CAMELS is an internationally adopted method that stands for capital adequacy, asset quality, management, earning, liquidity and system and control. The concept is based on US Federal Reserve’s CAMEL with an additional focus on systems and controls. Each of the above given parameters are looked at separately to ensure that the bank or the NBFC is in good health.
How is the inspection done?
In November 1994, RBI set up the Board for Financial Supervision. Under this, there are two departments that look after the rating process. The department of banking supervision is given the charge of banks, whereas department of non-banking supervision takes care of NBFCs. The departments, while inspecting and supervising these institutions, look at solvency, liquidity and operational health. RBI then communicates to these institutions the areas in which they are found lagging and they are asked to address these quickly. During the inspection, at least the head office of the institution and a few of their key branches are taken into consideration.
Do you get to see the ratings?
No. You do not have access to these ratings as a customer depositor, borrower or investor. The rating is not let out to ensure that the institution’s reputation is not hampered and has an adverse effect on its business.
However, a high level steering committee in a June 2012 report recommended that CAMELS be replaced by a risk-based supervisory model where more focus will be on the riskiness of the bank rather than on its performance. However, that too may not be in public domain.