Measuring Impact of CAMELS Model on Financial Performance of Indian Commercial Banks

Abstract

The purpose of this study is to examine the effects of CAMELS components on the financial performance of Indian commercial banks. To fulfill the objectives of the study,secondary data were collectedfor the fiscal year 2016 to 2021 from four public sector and four private sector banks based on their market capitalization. To analyse the data two econometric models are constructed using return on assets (ROA) and return on equity (ROE) as proxies for commercial banks’ financial performance as dependent variables and six CAMELS’s key indicators (capital adequacy, asset quality, management efficiency, earning quality, liquidity, and sensitivity to market risk)as independent variables. To determine the extent to which the independent variables have an effect on the dependent variable, panel ordinal least square regression with their assumption has been used. The findings of the study revealed that the financial performance of Indian banking sector as evaluated by ROA and ROE is statistically and significantly affected by capital adequacy, liquidity and sensitivity to market risk, whereas asset quality, managerial efficiency and earning quality is found to have insignificant impact on the financial performance of Indian commercial banks. In order to perform better, it is suggested that the commercial banks should focus more on the variables that have a substantial impact on their financial performance. Keywords: Random effect, ROA, ROE, liquidity, sensitivity to market risk, CAMELS.