Camel in Georgia

Banks are supervised to: 1. protect interests of depositors, 2. control whether banks meet all requirements by law, 3. avoid such complication of problems when it becomes impossible to correct them if not too expansive for government financial decisions are made, 4. be aware of problems and weaknesses a particular bank faces and examine reasons for that that helps supervisors to give recommendations and directives to such banks about how to overcome problems and difficulties they face.

Through regular monitoring the supervisors of commercial banks make all efforts to ensure that the banks in Georgia:

a) are financially reliable;

b) are managed skillfully;

c) do not endanger depositors' interests.

In compliance with the "Organic Law of Georgia on the National Bank of Georgia" (chapter VIII) NBG is authorized to police commercial bank activities, NBG assesses and controls risk level each commercial bank faces, hence protects them from choosing risky activities and whole banking system from the danger of undesirable failure, keeping safety and stability of banking sector. NBG has worked out "The Manual for Commercial Bank Supervision", which describes and explains policy and administration of bank inspection. NBG evaluates financial condition of each particular bank by use of rating system. General Rating System is an instrument to discover degree of stability of supervised bank and to expose banks with financial or operational weaknesses, those been in need of special attention. According to this rating system each bank is given composite rating, which is made up of five major components describing financial condition of commercial bank. This system called CAMEL rating evaluates capital adequacy (rating from 1 denoting well capitalized, to 5-undercapitalized banks), asset quality (form rate 1- banks with high quality assets to rate 5- critical standard of asset quality), management (from rate 1- banks with strong management to rate 5- weak management), earnings (from rate 1- high income banks to rate 5- banks experiencing loss that bank capital are not enough to absorb it) and liquidity (from rate 1- banks with high liquidity to rate 5- critical liquidity level). Composite rating is an average grade of all five component rates.

According to the CAMEL composite rating banks are ranked from 1 to 5 (table 10). 1 indicates the highest rating, strongest performance and risk assessment practices, hence does not need to be strictly supervised, herewith 5 is the lowest rating, weakest performance, banks given this rating has inadequate risk management practices and therefore are in need of sever control and requires corrective arrangements.

Table 10 CAMEL Composite Rating

Composite1– satisfactory

Banks in this group are stable in all its aspects and have components rated 1 or 2. Weaknesses are insignificant and can be handled through everyday management process. In an event of business fluctuations they keep their stability best. They follow legislation and have adequate risk management methods. Banks from this group are in need of less attention and supervision.

Composite2– adequate Banks in this group are fundamentally stable and sound. No component rating can be more than 3. Weaknesses are moderate and can be corrected. Such banks easily endure business fluctuations. They follow legislation. Risk management methods are satisfactory. Banks from this group need insignificant supervisory reactions.

Composite3–less adequate Banks in this group are with some weaknesses that bank management is unable to timely cope with. No component rating can be more than 4. They are very sensitive toward external effects and are less consistent to business fluctuations. Banks most probably break legislation. Risk management practices are not adequate. Considering financial condition of these banks it is less probable for them to fail, but strict supervision is still required.

Composite4– inadequate Banks in this group are less stable, with serious financial and managerial gaps. They are not resistant to environmental fluctuations. Have seriously violated legislation. Such banks need detailed supervision and serious corrective arrangements not to fail and hence shake the stability of banking systems.

Composite5– critical Extremely unstable banks. Their risk management is inadequate. They create serious supervisory problems. External financial support or other type of assistance is necessary to keep such banks solvent. They need to be permanently supervised. The probability of their failure is very high and thus banking system stability may be at serious risk if banks from this group will not get over the weaknesses they