m
 



Ê





a A system of classifying according to quality or

merit or amount
Ê  

Ê
 
×
a
aracterize or Describe Banks

a ompare Relative Strengt
of Banks

a Distinguis
Satisfactory Banks from ot
ers

a To monitor performance

a Ensure onsistency Among Regulators

a Drive Examination Report

a An international bank-rating system wit
w
ic

bank supervisory aut
orities rate institutions
according to six factors. T
e six areas examined
are represented by t
e " AMELS."
m
 !"
a T
e AMEL met
odology was originally adopted by
Nort
American bank regulators to evaluate t
e
financial and managerial soundness of U.S. commercial
lending institutions and also by by National redit
Union Administration (N UA) in October 1987
a It is used as an internal tool to measure risk and allocate
resources for supervision purposes.
T
e last version of t
e AMEL Rating System was
publis
ed in Letter to redit Unions No. 161, dated
December 1994
#  $m



a T
e existing m
 rating system produces a

composite rating of an institution's overall
condition and performance by assessing five
components
a T
e updated rating system now will be referred
to as t
e m

rating system, to
include ensitivity to Market Risk
a T
is was effected from January 1, 1997.
m
 


a T
e AMEL rating system is based upon an

evaluation of following critical elements×
g mapital adequacy

g sset quality
g
anagement

g arnings

g iquidity

g ensitivity to market
‘ ‘ m 

T
e purpose of AMELS ratings is to determine a

bankǯs overall condition and to identify its
strengt
s and weaknesses×
a dinancial

a Operational

a Managerial
  

a Eac
bank is assigned a uniform composite

rating based on six elements. T
e system
provides a general framework for evaluating t
e
banks.
a It is a standardized met
od w
ic
allows t
e
assessment of t
e quality of banks according to
standard criteria providing a meaningful rating½
‘ 


  



 

  



 



 

  
a Õ
 indicates strong performance× ’

½
a Õ
 reflects satisfactory performance.
a Õ
 represents performance t
at is flawed to some
degree.
a Õ
 refers to marginal performance and is significantly
below average and
a Õ

is considered unsatisfactory× Ê

.
a Based on t
e ratings of eac
element, a composite rating of 1
t
roug
5 is assigned to t
e bank. All t
e factors reflected in
t
e key components ratings are considered in assigning t
e
composite rating.
m‘%& m
m

m



 
 





 

a Nature and volume of problem assets in relation to total
capital and adequacy of LLR and ot
er reserves
a Balance s
eet structure including off balance s
eet items,
market and concentration risk
a Nature of business activities and risks to t
e bank
a Asset and capital growt
experience and prospects
a Earnings performance and distribution of dividends
a apital requirements and compliance wit
regulatory
requirements
a Access to capital markets and sources of capital
a Ability of management to deal wit
above factors
 & 
m


 



 





 

a Molume of problem of all assets
a Molume of overdue or resc
eduled loans
a Ability of management to administer all t
e assets of t
e bank
and to collect problem loans
a Large concentrations of loans and insiders loans,
diversification of investments
a Loan portfolio management, written policies, procedures
internal control, Management Information System
a Loan Loss Reserves in relation to problem credits and ot
er
assets
a Growt
of loans volume in relation to t
e bankǯs capacity

  

  

 
 


’



  


 m

  





 
  


   
 




½




 




 
a Œuality of t
e monitoring and support of t
e activities by t
e board and
management and t
eir ability to understand and respond to t
e risks
associated wit
t
ese activities in t
e present environment and to plan for t
e
future
a Development and implementation of written policies, procedures, MIS, risk
monitoring system, reporting, safeguarding of documents, contingency plan
and compliance wit
laws and regulations controlled by a compliance officer
a Availability of internal and external audit function

a oncentration or delegation of aut
ority

a ompensations policies
a Response to BI concerns and recommendations

a Overall performance of t
e bank and its risk profile


 m



 






 
a Sufficient earnings to cover potential losses, provide adequate capital
and pay reasonable dividends
a omposition of net income. Molume and stability of t
e components
a Level of expenses in relation to operations

a Reliance on extraordinary items, securities transactions,
ig
risk

activities
a Adequacy of budgeting, forecasting

a Earnings exposure to market risks, suc
as interest rate variations,

foreign exc
ange fluctuations and price risk
& %
 m







 
 




 
a Sources and volume of liquid funds available to meet s
ort term
obligations
a Molatility of deposits and loan demand

a Interest rates and maturities of assets and liabilities

a Access to money market and ot
er sources of funds

a Diversification of funding sources

a Reliance on inter-bank market for s
ort term funding

a Management ability to plan, control and measure liquidity process.

a ontingency plan
   
m






 







 

 
a Sensitivity to adverse c
anges in interest rates, foreign exc
ange
rates, commodity prices, fixed assets
ȄNature of t
e operations of t
e bank
ȄTrends in t
e foreign currencies exposure
Ȅ
anges in t
e value of t
e fixed assets of t
e bank
ȄImportance of real estate assets resulting from loans write off
a Ability of management to identify, measure and control t
e
market risks given t
e bank exposure to t
ese risks
m‘ 







 








 


 






 


 







 




  



  


  
  



 
  

  

 



½

m
 
ë m‘

a m

  


 m 

a m 














 
 
a T
e
ig
er t
e RAR, t
e stronger is considered a bank, as it
ensures
ig
safety against bankruptcy
a 


m





!










  
g Equity capital
g Disclosed reserves
a 


m





!!




 





  


 

g Undisclosed Reserves
g Revaluation Reserves
g General Provisions
g Hybrid Instruments
g Subordinated Term Debt
 
'
( 
'
(
a It is t
e more important of t
e two, consists largely of s
are
olders'
equity.
a S
are
olders equity and retained earnings are now commonly
referred to as " ore" Tier 1 capital
a 




g Invested money t
at, in contrast to debt capital, is not repaid to
t
e investors in t
e normal course of business. It represents t
e
risk capital staked by owners t
roug
purc
ase of t
e firm's
common stock. Its value is computed by estimating t
e current
market value of everyt
ing owned by t
e firm from w
ic
t
e
total of all liabilities is subtracted. On t
e balance s
eet of
firm, equity capital is listed as stock
oldersǯ equity or owners'
equity.
 
'
( 
'
(
a 
 
   
g created or increased by appropriations of retained earnings or
ot
er surplus, e.g. s
are premiums, retained profit,
general reserves
g 
" 

* T
e s
are premium account of a company is t
e capital t
at a
company raises upon issuing s
ares t
at is in excess of t
e
nominal value of t
e s
ares.
g  
 
"

* Profit attributable to ordinary equity s
are
olders less
dividends paid. Retained profit is t
e profit/loss for t
e
financial year transferred to/from reserves.
g r  
   
* T
e amounts are set aside so t
at w
en t
e future profits are
low, t
e company can utilize t
e reserves for distribution of
profits

'
( "

)


'
(
a 
 
   
g Undisclosed reserves are not common, but are accepted by some
regulators w
ere a bank
as made a profit but t
is
as not
appeared in normal retained profits or in general reserves of t
e
bank.
g Suc
reserves consist of t
at part of t
e accumulated after-tax
surplus of retained profits w
ic
banks in some countries may be
permitted to maintain as an undisclosed reserve.
a   

   
g A revaluation reserve is a reserve created w
en a company
as an
asset revalued and an increase in value is broug
t to account. A
simple example may be w
ere a bank owns t
e land and building
of its
ead-offices and boug
t t
em for $100 a century ago. A
current revaluation is very likely to s
ow a large increase in value.
T
e increase would be added to a revaluation reserve.

'
( "

)


'
(
a r  
"


g A general provision is created w
en a company is aware
t
at a loss may
ave occurred but is not sure of t
e
exact nature of t
at loss.
a 6

!    
g It includes a range of instruments w
ic
combine
c
aracteristics of equity capital and of debt. An example
of t
is is umulative preference s
ares
 
'
( "

)


'
(
a  
 
 
 
g includes conventional unsecured subordinated debt
capital instruments wit
a minimum original fixed term
to maturity of over five years and limited life
redeemable preference s
ares.
g Suc
debt is referred to as subordinate, because t
e
debt providers (t
e lenders)
ave subordinate status in
relations
ip to t
e normal debt.
g Subordinated debt
as a lower priority t
an ot
er bonds
of t
e issuer in case of liquidation during bankruptcy
g Subordinated loans typically
ave a
ig
er rate of
return t
an senior debt due to t
e increased in
erent
risk
* "


a In terms of t
e minimum amount of

capital t
at is required wit
in banks and ot
er
institutions, based on a percentage of t
e assets,
weig
ted by risk
a dor example, loans t
at are secured by a letter of
credit would be weig
ted riskier t
an a
mortgage loan t
at is secured wit
collateral.
‰    
ü 
"#
!r
 
ü Non-performing loans (NPL) / total loans

ü A  

 is a loan t
at is in default or close to
being in default. Many loans become non-performing after being
in default for 3 mont
s, but t
is can depend on t
e contract
terms
ü An asset, including a leased asset, becomes nonperforming w
en
it ceases to generate income for t
e Bank

ü !$
 
ü Total of Loans Delinquent / Total Loans
ü A loan t
at is 30 to 60 days past due wit
no payments being made
‰    
ü r
"
ü r
"
%

 

ü 
"
ü 
"
%

 

ü T
e amount of principal out standing is gross advance n t
e

principal toget
er wit
outstanding interest is net advance on
particular time.
ü A non-performing loan is a loan t
at is in default or close to being
in default. A loan t
at is 90 days past due wit
no payments
being made
   


   

ü ©

ü (Total Income-Total Expenditure)
ü T
is s
ould be positive

ü Administrative to total expense

ü Total Advance to Total Deposit Ratio
ü T
is ratio
measures efficiency and ability of banks
management in converting deposits available wit
banks into

ig
earning advances. Total deposits include demand
deposits, saving deposits, term deposit & deposit of ot
er
bank. Total advances also include receivables.
u   


ü  

 
& 
ü (
!

!  
 
& !  



'
%
 
 
 
ü 
!  


ü It is usually expressed as a percentage of w
at t
e
financial institution earns on loans in a time period
and ot
er assets minus t
e interest paid on
borrowed funds divided by t
e average amount of
t
e assets on w
ic
it earned income in t
at time
period
·  

ü 
!$!

%
 


g A measure t
at examines a company's net liquid
financial assets. T
e net liquid assets s
ow
ow
muc
of a company's liquid assets would be left if all
current liabilities were paid off.
alculated as×

g T
e sum of current and long-term assets owned by

a company is known as total assets
·  

ü  
 
%
 
"!

ü T
e amount of a bank's loans divided by t
e amount
of its deposits at any given time. T
e
ig
er
t
e ratio, t
e more t
e bank is relying on
borrowed funds, w
ic
are generally more costly
t
an most types of deposits.
 ·  
ü r
ü 
 


 
%

 








ü 
 
a 
 


 
( '
T
e dollar amount of interest earning assets t
at will
ave a rate c
ange due to
maturity, re pricing or principal pay down wit
in a predefined time period.
a 
 







('
T
e dollar amount of interest paying liabilities t
at will
ave a rate c
ange due to
maturity, re pricing, principal decay, or early wit
drawals wit
in a predefined time
period.
a 
 


 
%

 







Reveals t
e mismatc
between earning assets and paying liabilities wit
in a
particular time frame. An equilibrium will be ac
ieved w
en t
e ratio equals 100,
w
ic
implies t
at rate sensitive assets are equal to rate sensitive liabilities.
m
 

  

Ê
!
  
m



 


"
 )

' %'

$ ‘
ü (BID) is one of t
e core departments at SBP. Its mission
is to strive for soundness & stability of t
e financial
system and safeguard interest of stake
olders t
roug

proactive inspection, compatible wit
best
international practices
ü BID plays a pivotal role in meeting SBPǯs main
responsibility of supervising t
e financial institutions to
maintain soundness of t
e system and protection of t
e
interest of depositors, t
ereby ensuring public
confidence in t
e system.

' %'

$ ‘
ü During t
e decade of 1990s, t
e Bank undertook a number of
measures to strengt
en its supervisory and regulatory
capabilities. In 1997, services of an international consultant were
acquired by t
e Bank6 to undertake an in-dept
review of t
e
banking supervisory system and monitoring tec
niques. T
e
consultants recommended risk-based inspection of financial
institutions and AMELS ( apital, Asset quality, Management
soundness, Earnings, Liquidity & Sensitivity to ot
er risks)
system of off-site surveillance. T
e training of Bank officials
(bot
in t
e country and abroad) and up-gradation of
information tec
nology system is a continuing process for
effective implementation of t
e consultant's recommendations.
 
' %'
 $
‘
ü T
e present supervisory structure at t
e department is
institution focused w
ereby concerned Desk In-c
arges

ave been assigned specific institutions for effective
monitoring t
roug
on-site examination, off-site reports
from Banking Supervision Department and various market
reports
ü T
e regular on-site inspection is conducted on t
e basis of
AMELS dramework. ( apital, Asset Œuality,
Management, Earnings, Liquidity, Sensitivity and System
& ontrols). AMELS is an effective rating system for
evaluating t
e soundness of financial institutions on a
uniform basis and for identifying t
ese institutions
requiring special attention or concern.

' %'
 $
‘
ü Here t
e focus of inspection is generally on risk
assessment policies & procedures of t
e banks and
control environment to keep attac
ed risks wit
in
acceptable limits and compliance wit
laws, regulations
and supervisory directives
ü BID conducts t
e regular full scope examination of
banks pursuant to an inspection sc
edule;
owever,
flexibility exists in policy for frequency of inspections
depending upon t
e need to maintain safety &
soundness.
ü AMELS rating is a criteria to determine t
e frequency
of inspection of banks as weak institutions are given
greater attention.
ë m‘
ë m‘
‰    
  


   
u   

·  
·  
 


a " 


 ½ T
is is a rating system developed for credit unions by t
e
World ouncil of redit Unions (WO U). T
e rating system includes a
certification process called dinance Organization Ac
ieving ertified redit Union
Standards (dO US).
a r



 ½ Developed by PlaNetdinance.
a  "


  T
e drenc
Banking ommission introduced t
e annual
Organization and Reinforcement of Preventive Action (ORAP) Rating System in
1997 as a multi-factor analysis system for individual institutions.
a " 


 ½ T
e Bank of Italy
as introduced t
e annual PATROL
rating system in 1993 as an off-site supervision tool to give a systematic
representation of t
e financial
ealt
of individual banks and provide support in
prioritization of t
e use of supervisory resources in sc
eduling on-site
examinations.
a

 ½ Developed by Damian von Stauffenberg of MicroRate.
a 
"



m







 ½ Developed a set of
performance standards to serve as guidelines or benc
marks to assess t
e
operations of P
ilippine NGOs involved in Micro-finance.
a !


" 
 

" Developed by t
e ommittee of
Donor Agencies for Small Enterprise Development and Donor's Working Group on
dinancial Sector Development, United Nations apital Development dund.
 $
a
ttp×//www.ncua.gov/letters/Prior1996/E-LET161.
tml
a
ttp×//www.sbp.org.pk/about/banks_nbfis/capitalbanks/creq1.
tm
a
ttp×//www.federalreserve.gov/boarddocs/press/general/1996/199
61224/default.
tm
a
ttp×//www.ibtra.com/pdf/ amel%20Rating_IBTRA%20Journal.pd
f
a
ttp×//www.ncua.gov/letters/2000/00- U-08.pdf
a
ttp×//www.bank-ratings.net/camels/
a
ttp×//www.sbp.org.pk/departments/bid.
tm
a
ttp×//www.sbp.org.pk/reports/annual/ard 01/c
ap6.pdf
a
ttp×//www.sbp.org.pk/ecodata/NPL.pdf
a
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e.googleusercontent.com/searc
q=cac
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l=en&ct=clnk&g
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