The rating system to be used for foreign banks marks a departure from the CAMELS model--capital adequacy, asset quality, management, earnings, liquidity and systems--used for state-run banks.

In a recent communique to the country-heads of foreign banks, the Reserve Bank said: "The rating would be part of the annual financial inspection carried out under Section 35 of the Banking Regulation Act (1935). The composite ratings awarded to banks would be conveyed to the CEO in a secret communication for the limited information of the top management. The model is highly secret and should not be divulged except to board and board-levelofficials."

Based on the composite ratings, a foreign bank will be rated from `A' to `D' in descending order of performance, and they will imply the following:

* A: The bank is sound in every respect and gives no cause for supervisory concern;

* B: The bank is fundamentally sound and is operations are satisfactory. However, there are modest weaknesses and for which supervisory responses is limited to minor adjustments;

* C: The bank exhibits a combination of financial, operational or compliance weaknesses ranging from the moderately severe to unsatisfactory. Failure may only be a remote possibility, but the bank gives cause for supervisory concern and requires more than normal supervision to tackle defeciencies; and

* D: The bank has serious financial, operational and managerial weaknesses; it warrants a definite plan for corrective action. The bank requires close supervisory monitoring and financial surveillance. In critical cases that makes probability of failure high in the immediate future, thebank would require urgent aid from its shareholders or financial assistance from other sources to avoid liquidation or restructuring.

Under the rating model envisaged for foreign banks, performance under the heads of capital adequacy, asset quality, compliance and systems is rated separately on a scale of one to 100 in ascending order of performance. Each of these four components will have several parameters with specific weightage assigned to them. The 100 marks are to be distributed among these parameters based on their relative importance in that component.

INSIGHT
Striking the right note

The difference between the traditional CAMELS model and the new one appears to be on the emphasis on compliance and systems. As envisaged by the Reserve Bank, both are variations of one theme--that of having proper risk-management procedures, house-keeping and reporting systems. These constitute what the RBI calls systems, while the compliance parameter measures the extent to which these internalsystems are being supervised and conform to Reserve Bank's requirements. One parameter focuses on the oversight policies and systems, the other is an attempt to assess the extent to which these are being followed. These parameters are of course crucial to judge the health and working of banks. The new model, which recognises the crucial role played by management systems and supervision, is clearly an improvement.

--Manas Chakravarty