Comparative Analysis Of Financial Performance Of Kerala-Based Private Sector Banks Using The CAMEL Framework

The banking sector is a key player in the economic development of a country, mobilising savings, facilitating investments and providing financial intermediation to various economic activities. A proper and well-functioning banking system helps in maintaining financial stability, capital formation and overall economic growth of the economy. In India, the banking industry has gone through many changes over the years due to financial sector reforms, technological developments, regulatory changes and also increasing competition among banks. Due to these changes, it is important to periodically assess the financial performance and operational efficiency of banks. Financial performance analysis helps in understanding the financial strength, operational efficiency and risk handling capability of banks. The CAMEL model is one of the most popular and effective models for assessing the financial health of banks. The model analyses banks based on five important dimensions, namely Capital Adequacy, Asset Quality, Management Efficiency, Earnings Quality and Liquidity. Kerala has always been an important centre for banking activities in India, especially with private sector banks like Federal Bank, South Indian Bank, CSB Bank and Dhanlaxmi Bank playing a major role in the banking sector as well as contributing towards financial inclusion and regional economic development. With the competitive banking environment, it is essential to analyse the financial performance of these banks. The present study is based on the financial performance of the four selected banks in the period of 2020-21 to 2024-25, using the CAMEL framework. The study is mainly based on financial ratios taken from the published annual reports of the respective banks. Trend analysis is also used in addition to ratio analysis to gain insight into the changes in performance over the course of the study. By using the CAMEL model and comparative analysis, the study attempts to provide a better understanding regarding the financial stability, operational efficiency, strengths and weaknesses of the selected banks.

REVIEW OF LITERATURE

Factors that influence the financial performance of banks were studied by Fibriyanti and Nurcholidah (2021) using indicators of capital adequacy, asset quality, management efficiency, earnings and liquidity. The study concluded that the profitability and stability of banks can be significantly enhanced through proper capital management, efficient use of assets and good liquidity management. Al Zaidanin (2020) studied the financial performance of Jordanian commercial banks using the CAMEL model along with panel data analysis. The results indicated that the CAMEL framework is a good instrument to assess the performance of banks and also revealed the financial stability and efficiency differences between the selected banks. Gupta and Jaiswal (2020) used financial ratio analysis to examine the financial performance of selected public and private sector banks in India. The study noted that there were disparities in the performance of both the sectors, with the private sector banks being more profitable and efficient, and the public sector banks having some problems with asset quality and operational efficiency. Alemu and Aweke (2017) used the CAMEL model and financial ratio analysis to assess the financial performance of private commercial banks in Ethiopia. The findings revealed differences in financial stability and operational efficiency of the banks. Capital adequacy and liquidity were strong in some banks, while profitability and asset quality were weak in others. The study also found that the CAMEL framework can be applied to evaluate the performance of banks. Agustin (2016) conducted a study on the financial performance of Islamic banking units in Indonesia by comparing the financial performance of Islamic banking units in private banks and Islamic banking units in regional development banks. The study employed panel data of 18 banks for the period 2010-2014. Islamic banking units of regional development banks were found to be more successful than Islamic banking units of private banks, primarily due to lower credit risk, stable borrowers such as government employees and better regional supervision. Aspal and Dhawan (2014) analysed the financial performance of old private sector banks in India using the CAMELS model for the period 2007-2012. The study revealed significant differences in the performance of banks. Some banks had comparatively weak indicators, while Tamilnadu Mercantile Bank and Federal Bank had comparatively strong performance. The results indicated that there is a need for improvement in some areas, such as capital adequacy, asset quality and liquidity management. Haque (2014) has used financial ratio analysis and the ANOVA technique to analyse the financial performance of commercial banks in India for the period 2009-2013. The study revealed that there are significant differences in profitability indicators like Return on Assets (ROA), Return on Equity (ROE) and Net Interest Margin among banks and ratio analysis is useful in assessing banking performance. Ally (2013) used financial ratio analysis to study the financial performance of commercial banks in Tanzania. The study assessed the profitability, liquidity and efficiency indicators and identified variations in the performance of banks. It found that good financial management and prudent banking practices contribute to the performance and competitiveness of banks. Dang (2011) studied the CAMEL rating system as a framework for evaluating the financial soundness of banks. The study described the model based on capital adequacy, asset quality, management efficiency, earnings and liquidity. The results showed that the CAMEL model is a good tool for assessing the stability of banks and financial risks.

STATEMENT OF THE PROBLEM

The banking sector is a vital sector in the economic development of a country as it mobilises savings, offers credit facilities and facilitates investment and business activities. Banks also play a role in the efficient operation of the financial system and in the general economic development. Hence, it is essential to assess the financial performance of banks to gain insight into their financial strength, operational efficiency and resource management capabilities. Many earlier studies have analysed the performance of banks using financial ratio analysis and the CAMEL framework. However, most of these studies mainly focused on large public sector banks or the banking industry as a whole.

The private sector banks that have emerged from Kerala, like Federal Bank, South Indian Bank, CSB Bank and Dhanlaxmi Bank, have established a strong foothold in the Indian banking sector and play a significant role in banking activities in the region and the country. Although these banks are significant, there are only a few studies that have been done to compare and assess their financial performance in a detailed analytical framework. Furthermore, the financial performance of these banks in the last four years (2020-21 to 2024-25) has not been adequately analysed with the CAMEL model. Hence, there is a need to study and compare the financial performance and operational efficiency of these selected banks through the CAMEL framework.

SIGNIFICANCE OF THE STUDY

The present study is important as it tries to assess the financial performance of selected Kerala-origin private sector banks in a systematic manner with the help of the CAMEL framework. The study analyses key financial ratios such as capital adequacy, asset quality, management efficiency, earnings quality, and liquidity, providing insights into the financial health and performance of these banks. The results of the study can be beneficial to the bank management, investors, policy makers and future researchers to know the strengths and weaknesses of the selected banks. Moreover, the study also adds to the existing literature related to banking performance analysis by specifically focusing on Kerala-based private sector banks and by analyzing their performance during the recent years from 2020–21 to 2024–25.

OBJECTIVES OF THE STUDY

1. To analyse the capital adequacy position of the selected Kerala-based private sector banks.
2. To examine the asset quality of the selected Kerala-based private sector banks.
3. To evaluate the management efficiency of the selected Kerala-based private sector banks.
4. To assess the earnings quality of the selected Kerala-based private sector banks over the study period.
5. To analyse the liquidity position of the selected Kerala-based private sector banks.

RESEARCH METHODOLOGY

The researcher used the CAMEL model for analysing the financial performance of selected private sector banks. The CAMEL model mainly evaluates five important areas, namely Capital Adequacy, Asset Quality, Management Efficiency, Earnings Quality, and Liquidity. All these factors contribute to the understanding of the financial soundness and overall operational efficiency of banks. The present study is based on four private sector banks in Kerala, namely Federal Bank, South Indian Bank, CSB Bank and Dhanlaxmi Bank.

The study is primarily of secondary data which is obtained from the published annual reports and financial statements of the banks under study. The financial data for the last five years (2020-21 to 2024-25) was gathered primarily from the official websites and annual reports of the selected banks. The collected data were then analyzed using financial ratio analysis and trend analysis under the CAMEL framework so as to evaluate and compare the financial performance of these banks. The study tries to find out the strengths and weaknesses of the selected banks in the study period through this analysis.

DATA ANALYSIS AND INTERPRETATION

The researcher applied the CAMEL model to evaluate the overall financial performance and soundness of Federal Bank, South Indian Bank, CSB Bank and Dhanlaxmi Bank for the period 2020-21 to 2024-25. The analysis is carried out using five parameters, namely Capital Adequacy, Asset Quality, Management Efficiency, Earnings Capacity, and Liquidity.

Table 1: Capital Adequacy Ratio (%) of Selected Banks

Fig.1: Trend of Capital Adequacy Ratio of Selected Banks (2020–21 to 2024–25)

The table and figure above indicate the Capital Adequacy Ratio (CAR) of the selected banks of the private sector, namely Federal Bank, South Indian Bank, CSB Bank and Dhanlaxmi Bank, between 2020-21 and 2024-25. Capital Adequacy Ratio is a significant measure of the financial strength of a bank as well as its capacity to absorb potential losses. An increase in CAR usually implies better financial health and an increased capital base of the bank. Overall, the trend analysis indicates that the capital adequacy ratios of all the selected banks were higher than the regulatory minimum requirement throughout the study period. CSB Bank was in the best position with respect to capital among the selected banks, with Federal Bank and South Indian Bank in a steady yet improving status. The ratios in Dhanlaxmi Bank were lower in the past years, and the subsequent improvement indicates a stronger capital position and stability of the bank.

Table 2: Asset Quality Ratio of Selected Banks (2020–21 to 2024–25)

Fig.2: Trend of Asset Quality Ratio of Selected Banks (2020–21 to 2024–25)

The table provided above, and the figure indicate the ratio of Net Non-Performing Assets (Net NPA) of the selected banks in the private sector that includes Federal Bank, South Indian Bank, CSB Bank and Dhanlaxmi Bank between the years 2020-21 and 2024-25. Net NPA is a significant measure of asset quality as it provides the ratio of non-performing loans, the value is obtained after the provisioning. The lower Net NPA ratio indicates superior credit control and better asset quality. Trend analysis indicates that the quality of assets of all the selected banks improved during the study period. The asset quality of Federal Bank and CSB Bank was relatively better, and the Net NPA ratio remained relatively lower, whereas South Indian Bank and Dhanlaxmi Bank exhibited improvement as compared to the high levels of non-performing assets in the previous years.

Table 3: Management Efficiency Ratio of Selected Banks (2020–21 to 2024–25)

Fig.3: Trend of Management Efficiency Ratio of Selected Banks (2020–21 to 2024–25)

Management efficiency ratio is the measure of how well banks utilise their resources and make profits out of their total assets. An increase in the ratio usually reflects increased efficiency of the bank management in utilising its assets to generate income. The table and figure provided indicate the trend of the management efficiency ratios of Federal Bank, South Indian Bank, CSB Bank and Dhanlaxmi Bank between 2020-21 and 2024-25. Trend analysis reveals that most of the selected banks experienced improvements in their management efficiency ratios during the study period. CSB Bank was the most efficient, and South Indian Bank improved significantly in the later years. The general growth in ratios indicates that there is better utilisation of assets and better management efficiency among the chosen banks.

Table 4: Earnings Quality Ratio of Selected Banks (2020–21 to 2024–25)

Fig.4: Trend of Earnings Quality of Selected Banks (2020–21 to 2024–25)

The earnings quality ratio indicates the profitability of banks and indicates the effectiveness of a bank in generating net profit out of its total income. A higher ratio tends to indicate better earnings performance and financial efficiency. The data given in the table and figure show the trend of earnings quality ratios of Federal Bank, South Indian Bank, CSB Bank and Dhanlaxmi Bank during the period from 2020-21 to 2024-25. Trend analysis shows that CSB Bank has shown better earnings performance in the middle years of the study period, whereas Federal Bank has shown relatively stable profitability. South Indian Bank has improved greatly in recent years, but Dhanlaxmi Bank has registered relatively lower earnings ratios during the study period.

Table 5: Liquidity Ratio of Selected Banks (2020–21 to 2024–25)

Fig. 5: Trend of Liquidity Ratio of Selected Banks (2020–21 to 2024–25)