The financial sector plays crucial role in the functioning

The financial sector plays crucial role in the
functioning and development of an economy of a country because the success or
failure of the economy depends upon it. Stability in the banking sector is an essential condition
for maintaining financial stability. The banking sector is
a most dominant segment of the financial system which helps in capital
formation of an economy. The banking sector proficiently deploys mobilized
savings in productive sectors. A solvent banking system ensures the confidence
of depositors. Measurement
of the performance and financial soundness of the banking sector is an
imperative measure in order to judge the strength and weakness of the financial
system of an economy. The main areas to assess the performance and soundness of
a bank are operational efficiency, service quality and managerial
effectiveness. Sound financial health of a bank is significant for the depositors,
shareholders, employees and the entire economy because it determines banks’
abilities to compete in the sector. Good financial performance rewards the
shareholders for their valuable investment. This, in turn, promotes additional
investment and brings about a rapid growth in economy. While, poor banking performance
can leads to banking failure and crisis which have negative impact on the development
of economy. No doubt, commercial banks play a crucial role in the economic
development and resource allocation of countries. Thus,
the contribution of banking sector in the development of a country cannot be
under-estimated.
It
is of great importance to assess the overall performance of banks by
implementing a regulatory banking supervision framework. One of such measures
of supervisory concern is the CAMEL approach. The approach was implemented first
by the United States in 1980s to evaluate the performance of their banks. In
India, RBI has been following this approach since 1997. Here, the acronym ‘CAMEL’ stands
for, Capital Adequacy (C), Asset Quality (A), Management Efficiency (M),
Earnings Quality (E) and Liquidity (L).