Financial Distress and Bank Performance: A Study of Select Indian Banks

Abstract

Financial distress is technically used to evaluate the financial status of the firms in terms of insolvency and bankruptcy. In view of the rising corporate scams such as Enron, Parmalat, Satyam, Punjab and Sind bank, etc., it is imperative to predict financial distress as the fallout of bankruptcy causes heavy losses to the companies and thus affects the national economy. In particular, the banking sector plays a vital role in the economic development of a country. The main purpose of this study is to assess the financial performance of the banking sector in India using Altman (1968) Z-score model for the period 2012-2017. Z-score has been used as a tool to evaluate the credibility of the banks by estimating the Z-score values of the select banks in India. This value is useful when these banks demand loans from the RBI or any other funding agency. Thereafter, the effect of financial distress on the performance of banks has also been assessed by taking Tobin’s Q as the performance measure. The results revealed that distressed stocks outperform non-distressed stocks during the market upturns.

Keywords: Financial Distress, Banking Sector, Tobins Q

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