Camel Rating System

Posted in Finance, Accounting and Economics Terms, Total Reads: 1159

Definition: Camel Rating System

The rating system is used to determine the health of a financial system. This was originally instituted in U.S and later accepted by various regulatory authorities of the world. This is used to establish the overall condition of the bank. This is based on the ratio analysis of important financial indicators. This is combined with through book keeping and on site examination by regulatory dignitaries. In the United States Federal reserve bank, Federal Deposit Insurance Corporation and others. This is mainly used for internal records and is not released to the public. This is used to prevent bank run and keep tight liquidity control on the firm.

The six factors determining the rating are:

C- Capital Adequacy

A - Asset Quality

M- Management Quality

E- Earnings

L- Liquidity

S- Sensitivity

The camel Rating is from 1 to 5.

The one denotes the best scenario and 5 denotes the worst. The score of two and below is considered to be strong institution and a rating of three and below are kept under strict monetary watch.

The Capital Adequacy ratio is based on the liquidity maintained and the type of loans disbursed. The liquidity maintained is commensurate to the risk and allocation of funds to different sectors. This also depends on the economic condition, Growth plans and loan and investment decision. Asset Quality depends on the type of investment undertaken and future risk and diversification plans. The top management is also an important criterion of evaluation. They play crucial role in further investment plan and also the determines the portfolio of the institution. They also determine future business strategy of the institution. The internal system like the audit, information, Record keeping determines the legitimacy of the financial institution.

Hence, this concludes the definition of Camel Rating System along with its overview.


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