How CAMEL Model used in Credit Rating| Performance Evaluation & Ranking Method.
How CAMEL Model used in Credit Rating
Here, we study how CAMEL Model used for estimating Credit Worthiness of an issuer for determine Performance Evaluation. CAMEL model analysis is a standard test for performance analysis of financial institutions. It is Useful to classify a bank’s overall condition. Due to that CAMEL Rating System used by many Nationalized & Private Sector Bank like Axis Bank, ICICI Bank, State Bank of India etc.
CAMEL Model in Credit Rating:
CAMEL stands for Capital, Assets, Management, Earnings and Liquidity. Therefore,the CAMEL model is adopted by the rating agencies.
In addition,You may be like our other article “Credit Rating” and “How to decide Good Credit Rating”.Than you can read our previous article by just click on this Link.(https://tax-india.in/credit-rating-how-to-decide-good-credit-rating/)
CAMEL Model performance analysis
Composition of external funds raised and retained earnings, fixed and fluctuating dividends of preference shares & equity shares. and adequacy of long term funds adjusted to gearing levels, ability of issuer to raise further borrowings.
Revenue generating capacity of existing/proposed assets, fair values, technological/physical obsolescence, linkage of asset values to turnover, consistency, appropriation of methods of depreciation and adequacy of charge to revenues, size, ageing and recoverability of monetary assets like receivables and its linkage with turnover.
Extent of involvement of management personnel, team-work, authority, timeliness, effectiveness and appropriateness of decision making along with directing management to achieve corporate goals.
Absolute levels, trends, stability, adaptability to cyclical fluctuations, ability of the entity to service existing and additional debts proposed.
Effectiveness of working capital management, corporate policies for stock and creditors, management and the ability of the corporate to meet their commitment in the short run.
Above all, five aspects form the five core bases for estimating credit worthiness of an issuer which leads to the rating of an instrument. Rating agencies determine the pre-dominance of positive/negative aspects under each of these five categories.So, these are factored in for making the overall rating decision. For the reason that these five aspect of CAMEL Model used in Performance Evaluation of Nationalized & Private Sector Bank.
Credit Rating Agencies in India:
If you want to know about the Credit Rating Agencies in India and their works. than read our previous article.In this article we discuss about the meaning of Credit Rating and their Functions.
Similarly, you also check another post “How many depositories are there in India? How Depository Services Works”.
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