"The rating methodology for financial services companies is based on CAMELS model". Elucidate.

The rating methodology for financial services companies is based on CAMELS model encompassing Capital adequacy, Asset Quality, Management, Earning, Liquidity, System and Control. The working group set up by RBI under the chairmanship of Shri S. Padmanabhan recommended that the banks should be rated on the lines of International CAMELS Model. The parameters recommended by the committee are: Capital Adequacy: It is measured by the ratio of capital to risk-weighted assets. A sound capital base strengthens confidence of depositors. Asset Quality: One of the indictors for asset quality is the ratio of non-performing loans to total loans (GNPA). The gross non-performing loans to gross advances ratio is more indicative of the quality of credit decisions made by bankers. Higher GNPA is indicative of poor credit decision making. Management: The ratio of non-interest expenditures to total assets can be one of the measures to assess the working of management. This variable which includes a variety of expenses, such as payroll, workers compensation and training investment, reflects the management policy stance. Earnings: It can be measured as the return on asset ratio. Liquidity: Cash maintained by the banks and balances with central bank, to total asset ratio is an indicator of banks liquidity. In general, banks with a larger volume of liquid assets are perceived safe, since these assets would allow banks to meet unexpected withdrawals. Systems and Control: The internal controls, other systems and procedures of banks are considered.