There has been some improvement in the Indian banking sector after the reforms, and CAMELS framework is a natural framework to analyze this improvement. The present study compares the performance of public sector banks with private/foreign banks under the CAMELS framework. The data used for the study were the audited financial statements of a sample of 58 Indian banks for the period 2003-08. The results of the study show that private/foreign banks fared better than public sector banks on most of the CAMELS factors in the study period. The two contributing factors for the better performance of private/foreign banks were Management Soundness and Earnings and Profitability.

The banking sector occupies a very important place in the country’s economy, contributing directly to national income and its overall growth. Therefore, evaluation, analysis, and monitoring of its performance is very important.

In 1988, the Basel Committee on Banking Supervision of the Bank of International Settlements (BIS) proposed the CAMEL framework for assessing financial institutions, based on the evaluation of five critical elements of a financial institution’s operations: Capital adequacy, Asset quality, Management soundness, Earnings and profitability, and Liquidity. In 1997, it included the sixth component, Sensitivity to market risk, to form the CAMELS1 framework (Gilbert et al., 2000). Under the CAMELS framework, financial institutions are required to enhance capital adequacy, strengthen asset quality, improve management, increase earnings, maintain liquidity, and reduce sensitivity to various financial risks.

In the Indian context, the Department of Banking Supervision2 of the Reserve Bank of India (RBI) uses a different version of CAMELS rating for their on-site Annual Financial Inspection of all Indian commercial banks (including all public sector, private sector, and foreign banks), viz., capital adequacy, asset quality, management soundness, earnings and profitability, liquidity, and systems and control.