Credit rating agencies
The Reserve Bank of India established the S Padmanabhan Committee in 1995 to review banking supervision in India. The committee recommended focusing on financial soundness, managerial efficiency, and operational strength. It also recommended a 5-point rating system (CAMELS) based on capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk. Further, the Padmanabhan Committee ratings ranged from A (fundamentally sound) to E (critical financial weakness posing failure risk). In 2010, the RBI told banks to develop their own internal rating methodologies (AIRB) rather than relying solely on external ratings, bringing them closer to Basel II compliance.
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![[CREDIT RATING AGENCIES] October 4, 2014
CREDIT RATING AGENCIES OF INDIA
The first step towards rating of banks in India was taken up in 1995, when the Reserve
Bank of India established the S Padmanabhan Committee to take a fresh look at the
banking Supervision. S Padmanabhan Committee recommended that Banking
supervision should focus on the parameters of the Financial Soundness, Managerial and
Operational Efficiency and firmness.
The Padmanabhan Committee recommended 5 points rating, which was based upon the
CAMELS Model.
What is CAMELS Rating ?
CAMELS ratings is a Banks rating used in United States.
The 6 alphabets in CAMELS denote the following:
C : Capital Adequacy Ratio
A: Asset Quality
M: Management Effectiveness
E: Earning (profitability)
L : Liquidity (using the ALM Asset Liability Mismatch Considerations) S:
Sensitivity to market risk
What is Padmanabhan Committee Rating?
The Padmanabhan Committee recommended the following ratings:
A: Fundamentally sound in every aspect
B: Fundamentally sound but with moderate weakness](https://image.slidesharecdn.com/7kukktwqqbk8r1vewy8z-signature-76b390104e89ab9d8a0163a74d48a08d3e2a4a204bd65ddea806ec1bf9114ef1-poli-141007143107-conversion-gate01/85/Credit-rating-agencies-1-320.jpg)
![[CREDIT RATING AGENCIES] October 4, 2014
C: Financial, Operational and / or compliance weakness and raises supervisory
concerns.
D : Serious or moderate Financial , operational and / or managerial weaknesses that
could impair the future viability.
E: Critical Financial Weakness that has the possibility of failure
Internal rating: Latest Developments:
In May 2010, the RBI has told the banks that they should be ready with a new
methodology of internal rating of Capital Requirement. This is called Advanced Internal
Rating Based (AIRB) approach. As of now the banks had been following the
standardized approach, wherein banks assign risk to the asset based on the rating given
by external rating agencies. This makes the banks a step closer to becoming Basel II
compliant institution. Since the minimum CAR required is 9%, it is low for the
borrowers with best rating and higher for lower rating. RBI now wants banks to develop
their own methodology to rate borrowers rather than rely on external agencies.](https://image.slidesharecdn.com/7kukktwqqbk8r1vewy8z-signature-76b390104e89ab9d8a0163a74d48a08d3e2a4a204bd65ddea806ec1bf9114ef1-poli-141007143107-conversion-gate01/85/Credit-rating-agencies-2-320.jpg)
Credit rating agencies
- 1. [CREDIT RATING AGENCIES] October 4, 2014 CREDIT RATING AGENCIES OF INDIA The first step towards rating of banks in India was taken up in 1995, when the Reserve Bank of India established the S Padmanabhan Committee to take a fresh look at the banking Supervision. S Padmanabhan Committee recommended that Banking supervision should focus on the parameters of the Financial Soundness, Managerial and Operational Efficiency and firmness. The Padmanabhan Committee recommended 5 points rating, which was based upon the CAMELS Model. What is CAMELS Rating ? CAMELS ratings is a Banks rating used in United States. The 6 alphabets in CAMELS denote the following: C : Capital Adequacy Ratio A: Asset Quality M: Management Effectiveness E: Earning (profitability) L : Liquidity (using the ALM Asset Liability Mismatch Considerations) S: Sensitivity to market risk What is Padmanabhan Committee Rating? The Padmanabhan Committee recommended the following ratings: A: Fundamentally sound in every aspect B: Fundamentally sound but with moderate weakness
- 2. [CREDIT RATING AGENCIES] October 4, 2014 C: Financial, Operational and / or compliance weakness and raises supervisory concerns. D : Serious or moderate Financial , operational and / or managerial weaknesses that could impair the future viability. E: Critical Financial Weakness that has the possibility of failure Internal rating: Latest Developments: In May 2010, the RBI has told the banks that they should be ready with a new methodology of internal rating of Capital Requirement. This is called Advanced Internal Rating Based (AIRB) approach. As of now the banks had been following the standardized approach, wherein banks assign risk to the asset based on the rating given by external rating agencies. This makes the banks a step closer to becoming Basel II compliant institution. Since the minimum CAR required is 9%, it is low for the borrowers with best rating and higher for lower rating. RBI now wants banks to develop their own methodology to rate borrowers rather than rely on external agencies.