Banking and Insurance - Laws and Practice · Analysis of Financial Statements of Banks

Ratio Analysis of Banks and the CAMELS Framework

Updated 11 October 2026 · Fact-checked

Ratio analysis of banks means using financial ratios to judge a bank's health. CAMELS groups them under six heads: Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk. To solve a question, compute the ratio, compare it with a benchmark or earlier year, and state what it means.

Understand Ratio Analysis of Banks (CAMELS)

A bank is not like a manufacturing company. Its raw material is money, mostly deposits taken from the public. Its income is mainly interest on loans and investments, and its main cost is interest paid on deposits. So the usual company ratios, such as inventory turnover, do not help. Bank analysis uses ratios built for how a bank earns, lends and funds itself.

CAMELS is a supervisory framework to rate a bank on six parameters. Each letter asks one question about the bank:

C – Capital adequacy: does the bank hold enough capital to absorb losses? The key ratio is the capital to risk-weighted assets ratio (CRAR).
A – Asset quality: how good are the loans? Key ratios are gross NPA ratio, net NPA ratio and provision coverage ratio.
M – Management: is the bank run well? This is partly qualitative (governance, compliance, internal controls). Ratios such as business per employee and profit per employee help.
E – Earnings: is the bank profitable and is the profit sustainable? Key ratios are net interest margin (NIM), return on assets (ROA) and return on equity (ROE), plus cost-to-income ratio.
L – Liquidity: can the bank meet its payments when due? Key ratios are credit-deposit ratio, liquid assets to total assets and, under Basel III, the liquidity coverage ratio.
S – Sensitivity to market risk: how much would interest rate, exchange rate or price changes hurt the bank? This is judged through gap analysis, duration and investment portfolio measures.

A single ratio tells you little. You read a ratio against the bank's earlier years, against peer banks and against the regulatory minimum. A rising gross NPA ratio with falling CRAR is a warning sign. A high ROA with weak asset quality may mean profits are being overstated or provisions are too low.

In the exam, you are usually given figures from a balance sheet and profit and loss account and asked to compute ratios and comment. The comment carries marks as much as the calculation.

Key rules to remember

Capital to risk-weighted assets ratio (CRAR): CRAR = (Tier 1 capital + Tier 2 capital) ÷ Risk-weighted assets × 100; Measures capital strength. Compare with the minimum set by RBI under Basel III norms. Use the figure given in the question if a benchmark is stated.
Gross NPA ratio: Gross NPA ratio = Gross NPAs ÷ Gross advances × 100; Shows the share of loans that have turned bad before provisions.
Net NPA ratio: Net NPA ratio = (Gross NPAs − Provisions) ÷ (Gross advances − Provisions) × 100; Use the provisions held against NPAs. Net NPA is lower than gross NPA when provisions exist.
Provision coverage ratio (PCR): PCR = Provisions held against NPAs ÷ Gross NPAs × 100; Shows how much of the bad loans is already covered by provisions.
Net interest margin (NIM): NIM = (Interest earned − Interest expended) ÷ Average earning assets × 100; Core measure of lending profitability. Use average earning assets if both opening and closing figures are given.
Return on assets (ROA): ROA = Net profit ÷ Average total assets × 100; Shows profit earned per rupee of assets.
Return on equity (ROE): ROE = Net profit ÷ Average shareholders' equity × 100; Shows return to shareholders. Higher leverage can raise ROE and risk together.
Cost-to-income ratio: Cost-to-income = Operating expenses ÷ (Net interest income + Other income) × 100; Lower is better. It shows operating efficiency.
Credit-deposit (CD) ratio: CD ratio = Total advances ÷ Total deposits × 100; A very high ratio can strain liquidity. A very low ratio means funds are not being lent.
Business per employee: Business per employee = (Total deposits + Total advances) ÷ Number of employees; A management efficiency measure.

How to solve Ratio Analysis of Banks (CAMELS) questions

Use this method for any question on bank ratios or CAMELS, whether it asks for calculation, interpretation or both.

1Read the question and note which CAMELS parameter or ratio it asks about. Underline the figures given.
2Write the formula before you substitute. This secures method marks even if arithmetic slips.
3Check whether the denominator should be average or closing figures. Use what the question gives, and state your assumption.
4Compute each ratio to two decimal places and show the working in a clear line.
5Compare with the previous year, a peer bank or a stated benchmark. Say whether the position improved or worsened.
6Interpret in plain words: what does the ratio say about capital, asset quality, earnings or liquidity?
7Link ratios where relevant, for example high NPA and low ROA, and give a short overall conclusion.
8If asked for a rating or advice, suggest one or two practical steps such as raising capital, improving recovery or cutting costs.

Quickest way: Ratio, benchmark, meaning in three lines

When to use it: Use when time is short or the question carries few marks and asks for quick computation and comment.

Map each ratio to its CAMELS letter: CRAR to C, NPA ratios to A, NIM, ROA and ROE to E, CD ratio to L.
Write the formula and answer on one line each.
Add one line of meaning: good, weak, improving or deteriorating, with a reason.
Finish with one line on the overall position of the bank.

Common mistakes in Ratio Analysis of Banks (CAMELS)

Using total loans in the denominator of the NPA ratio without checking whether gross or net advances are needed
Gross and net ratios look similar, so students mix their denominators.
Fix: Gross NPA ratio uses gross advances. Net NPA ratio subtracts provisions from both the numerator and the denominator.
Using total assets instead of earning assets for NIM
NIM and ROA both look like profit over assets.
Fix: NIM uses net interest income over average earning assets. ROA uses net profit over average total assets.
Giving only numbers with no interpretation
Students treat the question as a pure calculation.
Fix: Add a short comment for every ratio: what it shows, how it compares and what it means for the bank.
Treating CAMELS as a list of ratios only
Management and sensitivity are qualitative, so students skip them.
Fix: Mention governance, internal controls, compliance record and interest rate gap analysis when covering M and S.
Judging a bank by one ratio
A high ROA or low NPA looks good on its own.
Fix: Read ratios together. Strong profit with thin capital or low provisions still signals risk.
Mixing up provisions and the provision coverage ratio
Both use the word provision.
Fix: Provisions are rupee amounts held. PCR is those provisions divided by gross NPAs, shown as a percentage.

Worked examples

Example 1

A bank has gross advances of ₹80,000 crore and gross NPAs of ₹4,000 crore. Provisions held against NPAs are ₹2,800 crore. Compute the gross NPA ratio, net NPA ratio and provision coverage ratio, and comment.

Show the solution

Gross NPA ratio = 4,000 ÷ 80,000 × 100 = 5.00%.
Net NPAs = 4,000 − 2,800 = ₹1,200 crore.
Net advances = 80,000 − 2,800 = ₹77,200 crore.
Net NPA ratio = 1,200 ÷ 77,200 × 100 = 1.55% (approx.).
PCR = 2,800 ÷ 4,000 × 100 = 70.00%.
Comment: one in twenty rupees lent is non-performing, which is a concern for asset quality. But 70% of NPAs are covered by provisions, so the net position is much better.

Answer: Gross NPA ratio 5.00%, net NPA ratio about 1.55%, PCR 70.00%. Asset quality is under pressure, but provisioning cushions the impact.

Example 2

A bank reports interest earned ₹9,000 crore, interest expended ₹5,400 crore, net profit ₹1,200 crore. Average earning assets are ₹60,000 crore and average total assets are ₹80,000 crore. Compute NIM and ROA and comment on earnings.

Show the solution

Net interest income = 9,000 − 5,400 = ₹3,600 crore.
NIM = 3,600 ÷ 60,000 × 100 = 6.00%.
ROA = 1,200 ÷ 80,000 × 100 = 1.50%.
Comment: NIM of 6.00% shows the bank earns a wide spread between lending and deposit rates. ROA of 1.50% shows healthy profit per rupee of assets.
Caution: confirm asset quality and provisions, since strong earnings can hide weak loans. Compare both ratios with earlier years and peers before concluding.

Answer: NIM is 6.00% and ROA is 1.50%. Earnings are strong, subject to a check of asset quality.

Exam tips

Write the formula first, then substitute. Method marks are given even when the final number is wrong.
Always add a comment. Papers are case-based, so analysis and conclusion carry marks along with calculation.
Learn what each CAMELS letter stands for and give one or two ratios under each in theory answers.
State the benchmark or comparison you use, such as the earlier year or the RBI minimum, rather than calling a ratio simply good or bad.
Keep ratios to two decimal places and show units, such as ₹ crore and %.

Practice questions from Analysis of Financial Statements of Banks

Ratio Analysis of Banks (CAMELS) in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CFA Level IICAMELS Approach to Analyzing Banks

Ratio Analysis of Banks (CAMELS): frequently asked questions

What does CAMELS stand for?

It stands for Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk. Supervisors use these six parameters to judge the overall soundness of a bank.

What is the difference between gross NPA and net NPA ratio?

Gross NPA ratio is gross NPAs divided by gross advances. Net NPA ratio deducts provisions from both NPAs and advances, so it shows the burden after provisioning.

Which ratios measure bank profitability?

Net interest margin, return on assets and return on equity are the main ones. The cost-to-income ratio shows how efficiently the bank earns that profit.

Is Management in CAMELS measured by ratios?

Only partly. It is largely qualitative, covering governance, controls and compliance. Ratios such as business per employee and profit per employee give supporting evidence.