The depends upon it. Stability in the banking sector

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. Assessment of the financial performance and soundness of the
banking sector is an imperative measure to judge the strength and weakness of
the financial system of an economy. The financial performance of a bank can be
measured in terms of 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 lead to banking failure and crisis which have negative
reactance on the economic growth of the country. 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. The approach evaluates the overall
performance and soundness of banks under different acronym such as Capital
Adequacy, Asset Quality, Management Efficiency, Earning Quality and Liquidity
position.