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

Gomti Bank reports that its liquid assets are Rs 240 crore and its total deposits are Rs 1,600 crore. A supervisor, assessing the 'L' component of CAMELS, calculates the liquid assets to deposits ratio. What is it, and what does a falling trend indicate?

The liquid assets to deposits ratio is 15% (240 divided by 1,600). A falling trend shows the bank has a thinner cushion to meet deposit withdrawals, so its liquidity position under CAMELS is weakening.

  1. A15%; weakening ability to meet deposit withdrawalsCorrect
  2. B15%; improving profitability
  3. C6.67%; weakening ability to meet deposit withdrawals
  4. D37.5%; weakening asset quality

Explanation

Ratio = 240/1,600 = 15%. The liquidity component looks at ability to meet obligations, so a falling ratio indicates a weaker liquidity cushion. 6.67% inverts the ratio, and profitability and asset quality are other CAMELS components.

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