In a landmark overhaul of banking regulation in the country, Bangladesh Bank (BB) has introduced a Composite Risk Rating (CRR) framework under its Risk-Based Supervision (RBS) regime, replacing the decades-old CAMELS model with a more forward-looking approach aimed at detecting risks before they spiral into crises.
Gradual scrapping of the long-standing CAMELS supervisory framework by the central bank marks one of the most sweeping changes in banking oversight in recent years.
The new framework shifts supervision from a backward-looking assessment based largely on historical financial performance to a forward-looking model that continuously evaluates risks across banks' operations, governance, internal controls and risk management systems.
Under the CRR framework, Bangladesh Bank will move away from the traditional one-size-fits-all inspection process and instead prepare bank-specific supervisory plans based on each institution's risk profile. Unlike CAMELS, which primarily measured capital, asset quality, management, earnings, liquidity and sensitivity to market risk, the new system is designed to detect emerging vulnerabilities early and allow regulators to intervene before problems escalate into full-blown crises.
The transition sends a strong signal that profitability alone will no longer determine a bank's supervisory standing. Banks with healthy financial performance could still receive poor ratings if they exhibit weak governance, ineffective board oversight, poor internal controls or inadequate risk management.
On this issue while talking with the Daily Observer, Sabbir Ahmed, President of the Institute of Chartered Accountants of Bangladesh (ICAB), said the success of Bangladesh Bank's new Composite Risk Rating (CRR) framework will depend far more on whether banks improve governance, strengthen internal controls and provide credible data than on the rating model itself.
The rating model is not the real problem. The real problem is how banks are governed, said Ahmed, who is also a partner at Hoda Vasi Chowdhury & Co.
He argued that governance standards vary widely across the banking sector, with many institutions still plagued by weak boards, poor oversight, ineffective internal controls and inadequate risk management. Unless these structural weaknesses are addressed, replacing CAMELS with CRR alone will do little to strengthen banks or prevent future financial stress, he said.
Ahmed also questioned the quality of information submitted by banks, warning that the effectiveness of the CRR framework depends entirely on accurate, timely and properly verified data. If banks continue to provide inaccurate or inconsistent information, regulators will be unable to obtain a true picture of their financial condition, regardless of how sophisticated the supervisory model is.
He said even the most advanced risk-based supervision system cannot compensate for weak governance or unreliable reporting. Without stronger accountability and credible data, confidence in the banking sector is unlikely to improve, raising the risk that the latest reform could fail to deliver its intended results.
Muzaffar Ahmed, Executive President of Credit Rating Information and Services Limited (CRISL), said the CRR framework provides Bangladesh Bank with a much broader assessment of a bank's overall risk profile than the previous CAMELS system.
He said the earlier framework focused mainly on financial indicators and regulatory compliance, whereas the new approach evaluates risks across all major banking activities. This enables supervisors to identify vulnerabilities much earlier and take corrective action before problems become more severe.
According to him, several important risk indicators were not adequately captured under CAMELS. By assessing multiple risk factors instead of relying primarily on financial ratios, Bangladesh Bank will be able to improve supervisory quality and make more effective regulatory interventions.
Md Abdul Mannan, head of credit at South Bangla Agriculture and Commerce Bank PLC described the transition from CAMELS to CRR under Risk-Based Supervision as a fundamental transformation in banking supervision.
He said CAMELS largely reviewed a bank's past financial condition, while the new framework focuses on future risks and the institution's capacity to manage them. Rather than depending solely on balance sheets, profitability and capital adequacy, Bangladesh Bank will now assess the level of risk embedded in a bank's business, along with the effectiveness of its board oversight, internal controls and risk management systems.
As a result, he said, even a profitable bank may receive a weak supervisory rating if it operates with excessive risks or poor governance. He added that the new framework replaces uniform inspections with risk-based supervisory plans tailored to each bank, enabling regulators to intervene before weaknesses evolve into crises.
Mannan said the reform sends a clear message that strong financial performance alone is no longer sufficient. Sustainable banking will increasingly depend on effective governance, sound risk management and the ability to identify and control risks before they threaten depositors, investors and the broader financial system.
