The CAMEL (Capital, Asset, Management, Earning and Liquidity) evaluation method consists of measuring and analyzing five fundamental parameters: Capital, Assets, Managerial Management, Profit Statement and Liquidity. This evaluation is used mainly in the financial sector to measure corporate risk.
It was a method adopted by the regulators of the North American Banking, in order to evaluate the financial and managerial soundness of the main commercial entities of the United States.
Generally, to carry out a CAMEL-type evaluation, the following information is required:
- financial statements; budgets and cash flow projections; portfolio amortization tables; sources of financing; information regarding the board of directors; operations / personnel patterns; macro-economic information.
The financial statements are the basis for the quantitative analysis carried out by CAMEL. Companies are required to submit duly audited financial statements for the last three years, as well as interim statements for the last 12-month period. The other required materials provide planning information and show how the institution has evolved. These documents demonstrate to CAMEL analysts the level and structure of the loan operations.
Rating Awarded by CAMEL
Based on the results of the duly adjusted financial statements, and the interviews with the executive and operational personnel of the companies, CAMEL assigns a rating ranging from one to five, for each of the 21 indices identified by CAMEL, which are weighed accordingly. Below is a definition for each area and the range of criteria that determine each rating:
Capital Suitability
The objective of the capital adequacy analysis is to measure the financial solvency of a company or financial institution, by determining whether the risks incurred are adequately balanced with the capital and reserves necessary to absorb possible losses..
- An index is the leverage that illustrates the relationship between the MFI's assets and its risks and its equity.Another index, the ability to capture equity, is a qualitative assessment of the MFI's ability to respond to the need to replenish or increase its equity at any given time. A third index, the adequacy of reserves is a quantitative measure of the reserves that the company has to confront portfolio losses and the extent to which the institution can absorb possible portfolio losses.
Quality of Assets
The analysis of asset quality is divided into three components: portfolio quality, portfolio classification system, and fixed assets.
- Portfolio quality includes two quantitative indices: portfolio at risk, which determines the amount of past due portfolio beyond 30 days; and sanctions / cancellations policy, which determines which are the cancellations and penalties introduced by the company based on CAMEL criteria. The portfolio classification system involves the review of the portfolio amortization tables and the evaluation of the policies that the institution has With respect to portfolio risk assessment. Under fixed assets, an index constitutes the long-term asset productivity, which assesses the company's policies regarding investments in fixed assets. The other index has to do with institutional infrastructure, which is evaluated to determine if it meets the needs of both staff and clients.
Gerencial administration
There are five indexes included in this aspect of the analysis: administration, human resources, processes, controls and auditing; computer technology system; and strategic planning and budgets.
- Administration focuses on how well the institution's board of directors or board functions, including its diversity of technical prowess, independence from management, and ability to make decisions flexibly and effectively.The second index, human resources assesses whether the human resources department provides clear guidance and essential support for operational staff, including hiring and training new staff, incentive systems for staff, and performance evaluation system. Third index, processes, controls and auditing is centered around the degree to which the company has formalized its key processes and the effectiveness with which it controls its risks throughout the organization,as inferred by its control environment and the quality of its internal and external audits. The fourth index, information technology system assesses computerized information systems and whether they are working effectively and efficiently, whether reports are generated for management purposes of timely and accurate manner. These analyzes review the information technology environment, as well as the magnitude and quality of the specific controls introduced in information technology. The fifth index, strategic planning and budgeting, inquires whether the institution carries out a comprehensive process and participatory to generate financial projections in the short and long term, and if the plan is updated according to the needs, and used within the decision-making process.The fourth index, information technology system assesses computerized information systems and whether they are working effectively and efficiently, whether reports are generated for management purposes in a timely and accurate manner. These analyzes review the information technology environment, as well as the magnitude and quality of the specific controls introduced in information technology. The fifth index, strategic planning and budgeting, inquires whether the institution carries out a comprehensive process and participatory to generate financial projections in the short and long term, and if the plan is updated according to the needs, and used within the decision-making process.The fourth index, information technology system assesses computerized information systems and whether they are working effectively and efficiently, whether reports are generated for management purposes in a timely and accurate manner. These analyzes review the information technology environment, as well as the magnitude and quality of the specific controls introduced in information technology. The fifth index, strategic planning and budgeting, inquires whether the institution carries out a comprehensive process and participatory to generate financial projections in the short and long term, and if the plan is updated according to the needs, and used within the decision-making process.Information technology system assesses the computerized information systems and whether they are working effectively and efficiently, whether reports are generated for management purposes in a timely and accurate manner. These analyzes review the information technology environment, as well as the magnitude and quality of the specific controls introduced in information technology. The fifth index, strategic planning and budgeting, investigates whether the institution carries out a comprehensive process and participatory to generate financial projections in the short and long term, and if the plan is updated according to needs, and used within the decision-making process.Information technology system assesses the computerized information systems and whether they are working effectively and efficiently, whether reports are generated for management purposes in a timely and accurate manner. These analyzes review the information technology environment, as well as the magnitude and quality of the specific controls introduced in information technology. The fifth index, strategic planning and budgeting, investigates whether the institution carries out a comprehensive process and participatory to generate financial projections in the short and long term, and if the plan is updated according to needs, and used within the decision-making process.These analyzes review the information technology environment, as well as the magnitude and quality of the specific controls introduced in information technology. The fifth index, strategic planning and budgeting, inquires whether the institution carries out a comprehensive process and participatory to generate financial projections in the short and long term, and if the plan is updated according to the needs, and used within the decision-making process.These analyzes review the information technology environment, as well as the magnitude and quality of the specific controls introduced in information technology. The fifth index, strategic planning and budgeting, inquires whether the institution carries out a comprehensive process and participatory to generate financial projections in the short and long term, and if the plan is updated according to the needs, and used within the decision-making process.Strategic planning and budgeting investigates whether the institution carries out a comprehensive and participatory process to generate financial projections in the short and long term, and whether the plan is updated according to needs, and used within the decision-making process.Strategic planning and budgeting investigates whether the institution carries out a comprehensive and participatory process to generate financial projections in the short and long term, and if the plan is updated according to needs, and used within the decision-making process.
Utilities
CAMEL chooses three quantitative and one qualitative indexes to measure the company's performance: adjusted returns on equity, operating efficiency, adjusted returns on assets, and the policy applied to the interest rate.
- Adjusted Return on Equity (ROE) measures the institution's ability to maintain and increase its net worth through the profits generated by its operations Operational Efficiency determines the efficiency the institution has achieved and guides its progress towards achieving a structure approaching the level achieved by formal financial institutions. Adjusted Return on Assets (ROA) measures how well the company's assets or institutional capacity have been used to generate profits on a defined asset base.CAMEL analysts also study the policy applied to interest rates that the company or financial institution has adopted in order to evaluate the degree to which the administration analyzes and makes adjustments to the institution's interest rates in relation to micro-business loans (and deposits, if applicable), based on cost of funds, profit goals, and macroeconomic environment.
Liquidity Management
The fifth area that CAMEL evaluates has to do with the institution's ability to handle decreases in sources of funds and increases in assets, as well as to cover expenses at a reasonable cost. The indices in this regard are based on the structure of liabilities, availability of funds to satisfy the demand for credit, cash projections, and productivity of other current assets.
Under the liability structure, CAMEL analysts review the composition of the institution's liabilities, including their trend, interest rate, payment conditions and sensitivity to changes in the macro-economic environment. The types of guarantees required by credit facilities, available credit sources and the extent to which the diversification of resources is analyzed in a good way.
This index also focuses on the relationship that is maintained with the bank in terms of leverage achieved on the basis of guarantees, level of credibility that the institution handles with respect to the banking sector, and the ease with which the institution can obtain funds when needed.
