A Critique on , A Comparative Study of Book Value Insolvency of Indian

Commercial Banks: An Application of Z-Score Model

This article gains its relevance with the global recession aftermath. We have seen that big
banks being closed down, people losing their investments and savings. Lehman brothers had
to close their operation. Meryll Lynch and other American banks faced tough challenges. For
an economy, especially a developing economy banks are the maor source of fund. !t is
imperative to understand the strength of the bank in terms of its performance. This article
tries to make a "uantitative study to analyse the strength of the banks.
#anks are e$posed to different types of risks and it is important for the bank to counter these
challenges in order to succeed. The relevancy of the subect cannot be brushed under the
carpet especially after the dramatic close down of %lobal trust bank in &''(.
The article goes through the study conducted by other researchers. )aunders studied the
relationship between ownership structure and risk taking of the banks. They came to a
conclusion that if the bank is owned by stockholders will have a greater risk taking initiative
when compared to managerially owned banks. !n another study by *ahman et al in &''+
,they found that lending for real estate activity puts the company in risk of insolvency as far
as conventional banks are concerned. As far as the study in !ndia were concerned bank si,e
was the most significant factor in influencing the insolvency risk.
Objectives:
To analyse the book value insolvency of !ndian commercial banks
To identify the key factors influencing the book value insolvency of !ndian
commercial banks.
To compare the book value insolvency of public and private sectors.
The two hypotheses formed are
-ull .ypotheses / There is no significant difference in the book value insolvency of
public and private sector banks of !ndia.
.0/ There is significant difference in the book value insolvency of public and private
sector banks of !ndia.
The authors have used 1 test statistics as a tool for testing the insolvency risk of the
banks . They have used banks profits, the realisable profits and capital base of the
respective banks.
12*3A4 5apital to asset ratio6sd of *3A
.igher 1 value shows that there is lower insolvency risk and vice7versa.
From the study it can be seen that the private banks have higher *3A as compared to
the public sector banks but however the standard deviation in case of private banks
are higher when compared to that public sector bank.1 value in terms of public sector
bank is &8.'9 in the year &''87': and it came down to 0+.(( in &''97'+. The decline
can be attributed to the financial crisis that affected the global business .The values
have fluctuated as a result of the turmoil .The private sector bank fared badly when
compared to the public sector banks. The study revealed that public sector banks are
safer when compared to private banks.
1 statistics can be considered as the safety inde$ against the insolvency risk.The result
shows that bank si,e is positively associated with 17statistics. #anks with larger asset
have lesser risk of being insolvent.All indian banks have the mandatory provision to
maintain +;capital ade"uacy ratio. The strong norms of the *#! helped the bank has
helped the bank to maintain strong position when compared to global peers.
!f a bank has higher -<A then the risk of insolvency is high and -!M has a inverse
<ublic and private banks when it comes to !nsolvency.
When it comes to ranking of !ndian banks )#! stands first followed by 5orporation
bank. The riskiest being =evelopment credit bank.
Findings:
The si,e of a bank has got direct relation to the risk of insolvency.
.igh capital ade"uacy ratio need to be maintained so that the bank will in a position
to deal with any emergencies.
#etter handling of -<A>s is a must.
Management decision influence the prospects of the bank.