In today’s digital environment, banks are increasingly adopting business transformation to stay competitive. The effectiveness of operational transformation initiatives should be tied to the realization of strategic business objectives. Business objectives are no longer measured in terms of pure cost reduction, but rather encompasses a wide range of business outcomes that are relevant to a bank’s performance.
CAMELS rating system is one of the most effective business outcome representations for Banks. Banks could leverage CAMELS to align operational transformation initiatives with their business objectives thereby establishing an effective business metrics framework. The CAMELS rating system comprises six elements viz. Capital adequacy, Asset quality, Management quality, Earning ability, Liquidity and Sensitivity – which explains the acronym CAMELS.
Implementing the Business Metrics Framework
By leveraging CAMELS to determine strategic priority, banks can identify the right kind of metrics at various levels and layers starting from strategy, to establishing linkages and identifying ownership for execution. This provides greater clarity of overall governance, ensuring achievement of the business outcomes. This framework can be applied across all services delivered by a business to its key stakeholders.
Various components of a bank’s condition that are assessed under the CAMELS system and the associated key outcome measures are depicted below.
- Capital Adequacy – Capital adequacy ratio; Net advances to total assets; Leverage ratio, Return on Equity
- Assets – Gross NPA to net advances; Net NPA to net advances; NPA to total assets; Total investments to total assets
- Management Capability – Total advances to total deposits; Business per employee; Profit per employee; Expenses per employee
- Earnings – Operating profit to average working fund; Net Profit to average assets; Interest income to total income
- Liquidity – Liquid asset to total assets; Liquid assets to total deposits; Earnings asset to deposit
- Sensitivity – Re-pricing or maturity mismatch risk, yield curve risk, basis risk
The deployment of business strategy follows a top down approach. However, the metrics linkages are established using a bottom up approach. To effectively target results through the framework, it is essential to understand how the strategy requirements are fulfilled through the right operational roll up measures.
While defining metrics at each level, it is essential to consider the following:
- Cause and effect between metrics (one to one or many to one) must be identified
- To arrive at appropriate outcomes, choose metrics that are commonly used and defined in industry
- Interpretation of the metrics should align with industry standard interpretations. This facilitates benchmarking and improvement for future purposes
- Provision should be made to accommodate multiple performance criteria to fulfill a certain capability
By leveraging CAMEL rating in developing a metrics framework, banks can derive a wide range of benefits. They include:
- Alignment with broader industry objectives
- Better governance of transformation programs that facilitate industry benchmarking
Gauging the Impact of the Transformational Journey
It is important to understand how transformational programs impact the business outcomes of the banks. Banks that adopt a results based approach to benchmarking their transformational initiatives can accurately assess the proposed initiatives, effectively position and articulate the transformation capabilities to their stakeholders.
How does your organization adopt business transformation to stay competitive?