Question

Why camels rating fail to recognize weakness of the banks?

Answer 1

Ans -In financial institutes, where CAMEL rating is used , 5 main aspects are analysed. They are management, liquidity, assets, earnings and capital.They are rated between 1-5 scale. Banks with 1 rating are considered best whereas rating 5 symbolises problem in the bank.

CAMEL rating failed to recognise weakness of banks due to certain loopholes.

1)This method suffers from problem of indeterminacy.Sometimes analyst face problem in examination of records as to give which score - average or lower than average.It is simple to spot bad or good signals or indicators, but not in case of 'in betweens' .This leads to indeterminacy problem.

2)Another problem rises when inspectors of banks are compelled to give their judgement and as different persons think differently, so they give their different perspectives leading to subjectivity problem.

3) It's not always possible for rating to measure the seriousness of the problem in banks leading to inaccurate results.

4) Rating is provided on the basis of information or records provided by the bank itself.So complete dependency on banks information is not correct.

5) This method considers only internal banking operations and present financial situation of bank. They don't analyse the regional economic growth which can be problematic in future. But CAMEL rating doesn't represent this.

6) This rating system doesn't have forward looking approach and also don't track risk elements in long period systematically.

So these are some reasons why CAMEL failed to recognise weakeness of banks.