The IUP Journal of Bank Management
Probabilistic Interpretation of Insolvency Risk in Public Sector Banks in India

Article Details
Pub. Date : May, 2022
Product Name : The IUP Journal of Bank Management
Product Type : Article
Product Code : IJBM030522
Author Name : Farida Rasiwala
Availability : YES
Subject/Domain : Finance
Download Format : PDF Format
No. of Pages :10



Banks play a vital role in channeling investors' savings. This paper investigates the probabilistic interpretation of the bankruptcy risk-evolved by Hannan and Hanweck (1988)-in Indian Public Sector Banks (PSBs) through the Z-index approach. Z-index has been used to determine the insolvency risk for 20 PSBs for the period 2010 to 2021. The secondary data was collected from the websites of respective banks and RBI. The data consists of 20 PSBs' Return on Assets (ROA) and Capital Adequacy Ratio (CAR). The results show that except Allahabad Bank, all PSBs' index is more than 10, offering a better financial position during the study period. Since the Z-index measured for SBI is highest among all the 20 PSBs, its financial soundness is reported to be at the top level. Therefore, there is no risk of insolvency for those banks with a high Z-index. The paper provides insights on trends of solvency position among the selected banks. It is helpful in improving the knowledge of banks' bankruptcy prediction and in analyzing their financial soundness. The paper reveals that bankruptcy could be due to poor management and improper investment estimation, leading to insolvency among the banks. A bank should focus on its ROA to improve its quality and avoid bankruptcy. CAR is also a sound indicator for a bank to maintain good solvency. Therefore, CAR and ROA are the most critical indicators to measure the risk associated with an investment in the banking sector.


The importance of banks' insolvency and liquidity risk was observed after the 2008 Global Financial Crisis. In terms of resilience, during global financial instability, India's banking sector differed significantly from that of other countries. A strong banking system is a key indicator of a country's economic strength, and Indian banking has played a critical role in the country's growth and development. Since independence, Indian banking has evolved through several distinct phases. On the basis of the Narasimham Committee's recommendations, the Government of India and RBI took a series of important reformative steps during the 'Reform