Functional Project on

“AN ANALYSIS OF INDIAN PRIVET BANKS WITH REFRENCE TO

ALTMAN Z-SCORE MODLE”

SUBMITTED IN PARTIAL FULFILLMENT FOR

THE AWARD OF THE DEGREE

MASTER OF MANAGEMENT STUDIES (MMS)

(Under University of Mumbai)

SUBMITTED BY

ASHISH RAMESH CHANDLIA

ROLL NO – M2123008

Under the Guidance of

DR. CHARU UPADHYAYA

ASSOCIATE PROFESSOR

MMS BATCH-2021-23

THAKUR INSTITUTE OF MANAGEMENT STUDIES & RESEARCH

C-Block, Thakur Educational Campus, Shyamnarayan Thakur Marg, Thakur Village,
Kandivali (East), Mumbai 400101
 CERTIFICATE

TO WHOMSOEVER IT MAY CONCERN

This is to certify that project title “AN ANALYSIS OF INDIAN PRIVET BANKS
WITH REFRENCE TO ALTMAN Z-SCORE MODLE” is successfully completed
by Mr. Ashish Chandlia during the IV semester in partial fulfillment for the award of
Master’s in Management Studies recognized by University of Mumbai for the academic
year 2022-2023 through Thakur Institute of Management Studies and Research. This
project is original and not submitted earlier for the award of any degree, diploma or
associateship of any other University / Institution

Dr. CHARU UPADHYAYA Dr. Pankaj Natu

(Asst. Professor, TIMSR) (Director, TIMSR)

Signature of Guide:

Date:

2
 DECLARATION

I, Mr. Ashish Chandlia declare that this Project Report - “AN ANALYSIS OF INDIAN
PRIVET BANKS WITH REFRENCE TO ALTMAN Z-SCORE MODLE” submitted by me
to the University of Mumbai through Thakur Institute Of Management Studies And Research
is a bonafied work undertaken by me is not submitted to any other University or Institution for
the award of any degree diploma certificate or publish any time before.

Student Signature

Name: Ashish Chandlia

Roll No.: M2123083

Specialization: Finance

Batch: MMS 2021-2023 F1 - A

3
 ACKNOWLEDGEMENT

It is not possible to prepare a project report without the assistance and encouragement of other
people. This one is certainly no exception.

On the very outset of this report. I would like to extend my sincere and heartfelt obligation
towards all the personages who have helped me in this endeavor. Without their active guidance,
help, cooperation and encouragement, I would not have made headway in the project.

I would like to thank our Director Dr. Pankaj Natu and Thakur Institute of Management Studies
and Research for giving me an opportunity to learn and understand about the Finance and
Research aspects.

Special thanks to Dr. Charu Upadhyaya for her valuable guidance in completing this project
and helping me to understand this project better and supporting me with her experience on the
same to make my project worth for my own benefit and also for the overall benefit of the
objective of the project.

My sincere and heartfelt thanks to all my teachers at the department of MMS, Thakur Institute
of Management Studies and Research for their valuable support and guidance.

4
 INDEX

Particular Page No.

1. Introduction
1.1. Introduction to Indian banking Sector 6
1.2. Key recent developments 11
1.3. Research Objectives 12
2. Literature Review 13
3. Methodology of Study
3.1. Research Design 16
3.2. Sampling Technique 16
3.3. Method of Data Collection (Secondary) 16
3.4. Data Analysis Tools 16
3.5. Interpretation of Results 17
3.6. Limitations 17
4. The Analysis & Interpretation
4.1. Data Analysis & Findings 32
4.2. Conclusion 46
5. Findings and Recommendations 47
6. References
6.1. Websites (As per the requirement) 50
7. Annexure
7.1. Plagiarism Report 52

5
 INTRODUCTION

Introduction to Indian banking Sector:

Bank is a central institution that makes relationship between the owner of fat savings and the
investor of insufficiency capital. In this process, banks earn profit by entering interest from the
borrowers who want to take short term and or long- term loans and making fairly lower interest
payment to the depositors for furnishing their finances for use by the bank (Khan, 2005).
According to Rose (2005) bank is a financial mediator accepting deposits and granting loans;
offers the widest menu of services of any financial institutions. This study focuses on prophecy
of financial health of public sector banking in India.

Global financial extremity blessed with growing inflation, currency deprecation, fiscal query,
high position of interest rates and restrained artificial product was strong enough to break down
the harshness of financial sector. The collapse of financial monsters Lehman sisters and Merrill
Lynch bought torture to multitudinous financial institutions across the globe. There are
different styles of measuring this torture like capital adequacy rate, profitability, liquidity or
crossbred model like CAMEL standing. An important model to assay financial soundness/
torture of any marketable house is Altman Z score model. The model scores the financial
soundness of marketable house in terms of Z values. Z score has originally been cooked by
Edward Altman to gesture the possibility of financial ruin of manufacturing units. But since
also, it has been constantly streamlined to make it applicable to private- manufacturers and
realities indulge in arising credit. The model claims for further than 70 delicacies in predicting
marketable ruin.

Request size- The Indian banking system consists of 12 public sector banks, 22 private sector
banks, 44 foreign banks, 43 indigenous pastoral banks, 1484 cooperative banks and 96,000
pastoral cooperative banks in addition to cooperative credit institutions. As of September 2021,
the total number of ATMs in India reached 217,308. In FY20- FY22, bank means across sectors
increased. Total means across the banking sector (including public and private sector banks)
increased toUS$2.67 trillion in FY22.

In FY22, total means in the public and private banking sectors were US$ 1,594.51 billion
andUS$925.05 billion, singly. During FY16- FY21, bank credit increased at a CAGR of0.62.

6
As of FY22, total credit extended surged to US$ 1,532.31 billion. During FY16- FY22, deposits
grew at a CAGR of10.92 and reachedUS$2.06 trillion by FY22. According to the RBI, bank
credit stood atRs.173.70 trillion (US$2.12 trillion) and credit to non- food sedulity stood
atRs.128.87 trillion (US$1.58 trillion) as of November 4, 2022.

7
Key recent developments in India’s banking industry include-

1) Improved risk management practices-

i) Indian banks are increasingly focussed on adopting integrated approach to risk
management.
ii) Banks have already embraced the international banking supervision accord of Basel
II.
iii) Most of the banks have put in place the framework for asset-liability match and
credit and derivatives risk management.
iv) The RBI introduced new auto debit rules with a mandatory additional factor of
authentication (AFA), effective from October 01, 2021, to improve the safety and
security of card transactions, as part of its risk mitigation measures.
2) Technological innovations-
i) By 2022, digital assistants, social media and third-party channels are projected to
act as primary channels for banking.
3) Focus on financial inclusion-
i) Ministry of Finance, Government of India, launched the Financial Inclusion Index.
This index will measure access, usage and quality to financial services.
ii) Department of Financial Services (DFS), Ministry of Finance and National
Informatics Centre (NIC), launched Jan Dhan Danrshak as a part of financial
inclusion initiative. It is a mobile app to help people locate financial services in
India.
4) Derivatives and risk management products-
i) The increasingly dynamic business scenario & financial sophistication has
increased the need for customized exotic financial products.
ii) Banks are developing innovative financial products & advanced risk management
methods to capture the market share
5) Consolidation-
i) With entry of foreign banks, competition in the Indian banking sector has
intensified.
ii) Banks are increasingly looking at consolidation to derive greater benefits such as
enhanced synergy, cost take-outs from economies of scale, organisational efficiency
and diversification of risks.

8
6) Focus on Jan Dhan Yojana-
i) The Government of India made Pradhan Mantri Jan Dhan Yojana (PMJDY) scheme
an open-ended scheme and also added more incentives.
ii) Key objective of PMJDY is to increase the accessibility of financial services such
as bank accounts, insurance, pension, credit facilities, etc. mostly to the low-income
groups.
iii) As of June 01, 2022, the number of bank accounts—opened under the government’s
flagship financial inclusion drive ‘Pradhan Mantri Jan Dhan Yojana (PMJDY)’—
reached 45.60 crore and deposits in the Jan Dhan bank accounts totalled Rs. 1.68
trillion (US$ 21.56 billion).
7) Wide usability of RTGS, NEFT and IMPS-
i) Real Time Gross Settlement (RTGS) and National Electronic Funds Transfer
(NEFT) are being implemented by Indian banks for fund transaction.
ii) Securities Exchange Board of India (SEBI) has included NEFT & RTGS payment
system to the living list of styles that a company can use for payment of tip or other
cash benefits to their shareholders & investors.
iii) The number of deals through immediate payment service (IMPS) reached455.70
million and amounted toRs.4.43 trillion (US$55.74 billion) in June 2022.
8) Know Your Client-
(i) RBI commanded the Know Your client (KYC) norms, wherein, all banks are needed
to put in place a comprehensive policy frame in order to avoid plutocrat laundering
conditioning.
9) RBI Retail Direct Scheme-
i) In November 2021, RBI launched the ‘RBI Retail Direct Scheme’ for retail
investors to increase retail participation in government securities.
10) Global Hackathon-
i) On November 09, 2021, RBI blazoned the launch of its first global hackathon'
precursor 2021 – Innovation for Transformation' with the theme ‘Smarter Digital
Payments’.
ii) The hackathon will request actors to honor and develop results that have the
eventuality to make digital payments accessible to the underserved, enhance the
ease of payments and stoner experience, and strengthen the security of digital
payments and promote client protection.

9
Future-
Enhanced spending on structure, speedy perpetration of systems and durability of reforms are
anticipated to give farther motivation to growth in the banking sector. All these factors suggest
that India’s banking sector is poised for a robust growth as fleetly growing businesses will turn
to banks for their credit requirements.

Also, the advancement in technology has brought mobile and internet banking services to the
fore. The banking sector is laying lesser emphasis on furnishing bettered services to their guests
and upgrading their technology structure to enhance client’s overall experience as well as give
banks a competitive edge.

India’s digital lending stood at US$ 75 billion in FY18 and is estimated to reach US$ 1 trillion
by FY23 driven by the five-fold increase in the digital disbursements. By 2025, India's fintech
request is anticipated to reachRs.6.2 trillion (US$83.48 billion).

10
OBJECTIVE OF THE STUDY

• To understand the meaning and importance of Altman Z score.

• To understand risk of bankruptcy and performance of bank over the period of 5 years.

• To assess the financial health and stability of Indian banks using Altman Z Scores, and
identify potential risks of financial distress.

• To examine the variations in Altman Z Scores across different banks in the Indian
banking sector, indicating variances in financial stability.

• To provide insights and recommendations based on the findings of the analysis to

enhance the understanding and management of financial risks in the Indian banking
sector.

11
LITERATURE REVIEW

The literature review in this study focuses on examining the operation of Altman Z Scores in
the environment of the Indian banking sector. multitudinous scholars and experimenters have
explored the use of Altman Z Scores as a tool for assessing the fiscal health and stability of
banks in India.

Several studies have set up that Altman Z Scores can effectively prognosticate the liability of
fiscal torture and ruin in the Indian banking sector. For case, a study by Singh and Jindal (2019)
examined the fiscal health of Indian banks using Altman Z Scores and set up that a significant
number of banks were in the torture zone, indicating implicit fiscal pitfalls.

likewise, Altman Z Scores have been used in empirical exploration to estimate the performance
and stability of specific banks in India. For illustration, a study by Gupta and Misra (2018)
anatomized the fiscal health of public sector banks in India using Altman Z Scores and set up
significant variations in the scores across different banks, indicating varying situations of fiscal
stability.

also, experimenters have delved the determinants of Altman Z Scores in the Indian banking
sector. A study by Mathew etal (2017) examined the impact of colorful fiscal rates on Altman
Z Scores in the Indian banking sector and set up that liquidity, profitability, and influence rates
were significant determinants of the scores.

likewise, experimenters have compared the prophetic delicacy of Altman Z Scores with other
fiscal rates and models in the Indian banking sector. For case, a study by Kumar and Sah (2019)
compared the effectiveness of Altman Z Scores with CAMELS (Capital Adequacy, Asset
Quality, Management Quality, Earnings, and Liquidity) standing in prognosticating bank
failures in India and set up that Altman Z Scores had advanced prophetic delicacy.
Ebiringa (2011) applied the Altman’s Z- Score model to three Nigerian banks for
prognosticating torture. Considering the data, four times previous to the banks declaring their
torture, the author set up that the model could prognosticate fiscal torture at 1 position of
significance.

12
Cole and Gunther (1998), in their exploration study, have compared the operation of CAMEL
standing and econometric vaticinations for prognosticating bank failures. The authors observed
that the delicacy of econometric analysis is more compared to CAMEL analysis because there
will be a progressive loss of information handed by CAMEL standing, from the alternate or
third quarter.

Zhang and Zhang (2016) studied a sample of 629 bank holding companies in the U.S., to
determine the impact of factors on the fiscal torture, with regard to the recent fiscal extremity.
The authors set up that casing price indicator and nonsupervisory capital conditions were
appreciatively related to the Z- Score measure. In addition, nonperforming loans are significant
in prognosticating fiscal torture.

Sahut and Mili (2009) prognosticated the fiscal torture, in banks of MENA countries, by means
of bank specific and macro variables. The authors set up that while pointers of financial policy
didn't affect bank torture, bank capitalization and nonsupervisory supervision need to be given
due consideration Financial Performance Analysis of Select Indian Public Sector Banks Using
Altman’s.76 for precluding torture.

Niresh and Pratheepan (2015), in their exploration study, considered the enterprises operating
in the trading sector of Sri Lanka from 2010 to 2014. The authors applied Altman’s original
model for ruin vaticination. They set up that all the enterprises were in torture or in the slate
zone, with none being in the safe zone.
Chandra and Selvaraj (2013) analyzed the financial health of select Indian steel companies
using the Altman’s Z-Score. The authors found that small companies, were in the ‘grey zone’
while the medium and large companies were in the ‘distress zone’. None of the select
companies was in the safe zone because their profits were not enough to cover their non-
operating activities.

Balachandran and Sriram (2005) analyzed the financial solvency position of LMW company,
(a manufacturer of textile machinery), using the Altman’s Z-Score model. The authors did not
find any significant difference between the actual and the projected Z-Scores. They concluded
that the company’s financial position was sound even though the industry was facing
difficulties.

13
Bandyopadhyay (2006) developed a model, to predict bankruptcy for Indian corporate bond
sector, based on MDA and the logistic regression model. The ratios considered were leverage,
turnover, liquidity and such other financial variables. The results of the study indicated that the
default risk can be predicted more accurately by including the financial and non-financial
parameters, in the logistic regression analysis.

Bhunia and Sarkar (2011) analyzed 64 private companies in the pharmaceutical sector, using
sixteen financial ratios and MDA. The ratios pertained to solvency, liquidity, profitability and
efficiency of the firms. The authors concluded that MDA can act as a reliable statistical tool
even though many advanced statistical tools are available.

Jan and Marimuthu (2015) analyzed the bankruptcy aspect of 25 select Islamic banks, using
the Altman’s model. The Altman’s Z-Score indicated that liquidity, insolvency and
profitability (considered as performance indicators) recorded significant relationship while
productivity does not have significant relationship with bankruptcy.

Ongore and Kusa (2013) analyzed the financial performance of commercial banks in Kenya,
using the multiple regression and Generalized Least Square models. The research findings
revealed that the performance of the banks was significantly influenced by the bank specific
variables (except the liquidity variable), along with the decisions of the management. However,
macroeconomic factors did not have any significant influence.

14
RESEARCH METHODOLOGY

A. Research Design: The research design for the analysis of Altman Z-Score in the Indian
banking sector will be quantitative in nature, as it involves the collection and analysis of
numerical data. The research design will be descriptive in nature, as the primary aim is to
describe and analyze the financial health of Indian banks using the Altman Z-Score model.

B. Sampling Technique: A purposive sampling technique will be used to select the sample of
Indian banks for the analysis. The sample will include both public and private sector banks in
India, representing a diverse range of banks in terms of size, ownership, and financial
performance.

C. Data Collection: Secondary data will be collected for the analysis, which will include
financial statements of the selected Indian banks for a period of 5 years. The financial
statements will be obtained from the annual reports of the banks, published on their respective
websites or from financial databases such as Money Control, ET Market and Ace Equity. The
financial data will include variables such as total assets, total liabilities, net income, equity, and
other relevant financial ratios.

D. Data Analysis: The collected data will be analyzed using the Altman Z-Score model, which
is a widely used financial distress prediction model. The Altman Z-Score is calculated using
the formula: Altman Z-Score (non-manufacturers) = (6.56 x A) + (3.26 x B) + (6.72 x C) +
(1.05 x D), where A, B, C and D are financial ratios based on the financial data collected. The
financial ratios used in the Altman Z-Score model include variables such as working capital to
total assets ratio, retained earnings to total assets ratio, earnings before interest and taxes
(EBIT) to total assets ratio, market value of equity to book value of total liabilities ratio, and
sales to total assets ratio.

E. Interpretation of Results: The calculated Altman Z-Score values for the selected Indian
banks will be interpreted based on the thresholds provided by Altman to classify banks into
different financial health categories, such as safe, gray zone, and distress. The results will be
presented using descriptive statistics such as mean, median, and standard deviation, and

15
graphical representations such as bar charts or line charts to effectively communicate the
findings.

F. Limitations: The analysis of Altman Z-Score in the Indian banking sector may have some
limitations, including the availability and accuracy of financial data, potential changes in
accounting standards or regulations over the years, and the dynamic nature of the banking
industry. These limitations will be acknowledged and discussed in the research report to
provide a comprehensive analysis of the findings.

ALTMAN Z-SCORE MODEL

In 1968, Edward I Altman (1968) developed and presented a multi-discriminant model which
computed a Z-score, as an assessment tool to assist risk analysts. He considered that univariate
prediction models served in most cases as indicators and not as predictors of bankruptcy. The
formula uses a statistical technique known as multiple discriminant analysis (MDA), by which
Altman attempted to predict defaults by use of the following five accounting ratios (Hayes et
al., 2010).
The final discriminant function estimated by Altman in 1968, is as follows (Altman et all,2014)
𝑍 = 1.2𝑋1 + 1.4𝑋2 + 3.3𝑋3 + 0.6𝑋4 + 1.0𝑋5………Equation 1
Where,
X1 = Working capital/Total assets
X2 = Retained Earnings/Total assets
X3 = Earnings before interest and taxes/Total assets
X4 = Market value of equity/Book value of total liabilities
X5 = Sales/Total assets
Z = Overall Index

• X1 Working capital / Total asset Working capital is a common measure of a company's

liquidity, efficiency, and overall health. Total assets show the overall assets of banks
including both short and long-term. The WC/TA ratio is a sign of a bank’s liquidity and
ability to meet creditor's short-term obligations.

16
• X2 Retained earnings / Total assets Retained earnings is the amount carried out to the
coming years from net earnings. Accumulated Retained Earnings to Total Asset (TA)
is the ratio that measures the accumulated profitability of the banks.

• X3 Operating earnings Total means Earnings before Interest and levies( EBIT) show
the operating profit of banks. EBIT to Total Asset measures the operating effectiveness
of an association. The value of this rate indicates the capacity of the establishment to
induce satisfactory earnings to pay off its fixed obligation like interest.

• X4 Book value of equity/ Total arrears This is the rate of Book value of shareholder’s
Equity to total arrears. This rate indicates the long- term fiscal soundness of the banks.
Having 11 equity debt blend is considered as relatively good, whereas inordinate debt
represents the peril of bankruptcy.

• X5 Deals Total means rate This is the standard capital- development rate illustrating
the deals generating capability of the means of a establishment. It refers to the capability
of operation in dealing with competitive conditions. This rate was dropped in the Z ”-
Score model.

17
Altman Z Score formula (non-manufacturers and companies in arising
requests)
The Altman Z Score was also acclimated for non-manufacturing companies and companies in
arising requests. Then the formula diverges quite a lot from the original formula similar that
only four crucial rates are taken into consideration. The deals to means rate is taken out and the
co-efficient were-estimated as well.

The formula for each is given below

Altman Z- Score(non-manufacturers) = (6.56 x A) + (3.26 x B) + (6.72 x C) + (1.05 x D)
Altman Z- Score (emerging markets) = 3.25(6.56 x A) + (3.26 x B) + (6.72 x C) + (1.05 x
D)
where
A = Working Capital/ Total means
B = Retained Earnings Total means
C = Earnings Before Interest and levies Total means
D = Book Value of Equity/ Total arrears
and

• Safe Zone (Z>2.6) Then again, the values diverge significantly from the former
formulas with the ‘Safe Zone’ now being assigned to companies with a Z Score over2.6.

18
 similar companies are less likely to head towards ruin and will be considered to be in
good fiscal health

• Grey Zone (2.6> Z>1.1) The slate zone too is lowered then to values of Z between2.6
and1.1. similar companies are considered to be of moderate threat of ruin in both non-
manufacturing and companies in arising requests

• torture Zone (1.1> Z) Then, the torture zone is held for companies with a Z Score value
of lower than1.1. similar companies pose a large threat of heading towards ruin in the
coming couple of times or show a poor fiscal health.

19
The five key financial ratios that make up the Altman's Z Score formula in detail and
individually.

• Working capital / total assets: To determine the health of a company on a short- term
fiscal health base, Altman uses the company's working capital which is the difference
between the current means of a company and its current arrears. Depending on whether
the working capital is positive or negative, we get a fair understanding of the growth
capacity of the company. In short, this rate measures the liability of the establishment.

• Retained earnings / total assets: high retained earnings to total means rate shows that
the company does not need to be dependent on borrowings and can grow and fund
capital expenditure using it's retained earnings. Whereas low retained earnings mean
the backing is being done using espoused finances. In short, this rate measures
accumulated gains in relation to the means.

• Earnings before interest and taxes (EBIT) /total assets: Earnings Before Interest and
duty, also known more generally by its condensation as EBIT in the fiscal world,
measures the company's capability to induce gains simply from its own operations.
Hence, this rate lets us know a company's capability to stay profitable and fund growth
in the future. In short, this rate helps measure how important profit the establishment’s
means are producing.

• The equity's market value / total assets: The request value of equity supplies us with the
information of request capitalization or as the name suggests, the value of the
company's equity. To get this detail, we multiply the current price of stocks with the
total number of outstanding shares and it helps us understand the degree to which the
company's request value would decline in a case of bankruptcy before the value of
arrears exceed the value of means in the balance distance. A low request value of equity
in comparison to the arrears would indicate a weak investor confidence in the fiscal
strength of the company.
• Total sales / total assets: A high deals to total means rate shows us how important the
company's means are generating in earnings compared to its means. This rate also
shows us the effectiveness of the company where a high trade to total means rate

20
indicates high profitability and a lower reliance on investments to induce unborn deals.
Whereas a low trade to total means rate indicates advanced reliance on coffers and
investments in future.

21
 Accuracy, effectiveness, use and criticisms of Altman Z Score Formula

The Altman Z Score has been extensively used all over the world to calculate the chances of
dereliction of their lending portfolios. also, a lot of investment enterprises as well feel the
Altman’s formula has done a good job at prognosticating ruin of enterprises. The formula is
also used extensively by barricade finances.

The paper “PREDICTING FINANCIAL DISTRESS OF COMPANIES: REVISITING THE

Z-SCORE AND ZETA®MODELS” published by Edward Altman in July 2000 shows that in
original tests, the formula has an delicacy of 72 in prognosticating ruin two times before the
event, an excellent by indeed moment’s standard making it that much more precious back also.
But in posterior tests which followed over the coming 31 times up until 1999, the formula was
actually set up to be 80- 90 accurate in prognosticating ruin one time before the event.

The formula is veritably helpful to both the investor as well as the establishment itself. It also
helps the operation of worried companies on whether they should or shouldn't file for ruin. The
formula has also been extensively used by accountants, database systems, loan observers
(Eidleman), courts and adjudicators. The formula is used throughout the world in different
surrounds.

Altman also believes as he participated in an interview that the formula helped him fairly
prognosticate the 2008 extremity and he feels that had the Z Score formula been used rather of
credit score conditions, we'd have had a much better idea of the imminent meltdown. He feels
moment as well, we're in a analogous bubble staying to burst with scores being no better than
they were in 2007.

still, not all experts and scholars partake the same view nor the same position of faith in the Z
Score formula with some feeling it’s a largely descriptive statements lacking any prophetic
content whatsoever. Nor do they feel the Altman formula can be used for fiscal companies
because of the nebulosity of the companies’ balance wastes and their frequent use of out-
balance distance particulars.

22
These days the experts and academics prefer counting on request- grounded data rather of the
account rates that Altman uses in his models.

23
History of the Altman Z Score Formula

Altman’s work on Z Score formula was innovated or discovered by him from scrape and was
grounded on the work of his forerunners like the account experimenter William Beaver.
William Beaver was the original one to apply the t- test system to prognosticate ruin for a
brace- matched sample of enterprises and hence making him the first to apply a statistical
system for the computation of the same. The way William Beaver carried out his exploration
and expression were grounded on univariate analysis by applying this system to estimate the
significance of each individual account rates one at a time.

How Altman erected upon and bettered this was by applying a statistical system and
discriminant analysis which could contemporaneously take multiple variables in account.
Altman’s work can also say to be a modified interpretation of R.A. Fisher’s work which
excavated a lot into discriminant analysis ways.

When asked in an interview as to the background and how Altman came across the problem
and developed the formula as a result, Edward Altman said that when he was a graduate pupil
at UCLA in the 1960s, one of his instructors Professor J. Fred Weston suggested the content
of ruin because he knew Altman was looking for a content for exploration. Professor J. Fred
Weston wrote a one- word note “ruin” and handed it to Altman. Little did Altman know at the
time that his formula would still be in wide use 50 times from also. Because back also back
also ruin wasn't considered the most popular sector to exploration on the exploration on
measures to look at the fiscal threat of companies was still in its immaturity.

Altman decided to look at the subject of prognosticating fiscal torture of companies using a
multivariate approach. He decided to combine a number of fiscal pointers using discriminate
analysis to prognosticate ruin.

Altman submissively credits his advance not to his own brilliance but to timing and luck and
feels he was the at the right place and the right time as a PhD pupil. It was during the mid1960s
that the use of computers was starting to be available extensively on the American council
premises and he felt that had he been a pupil just a many times agone

24
, he might not have had access to the same. But at the same time had he been a pupil just a
many times latterly, perhaps someone differently would have done and wrapped up the same
work rather of him.

The Altman Z- Score formula was developed by Altman to gauge the state of fiscal difficulty
endured by a company and to estimate it’s stability. This conception of developing a formula
for vaticinating the probability of ruin of a company played an important part during the Great
Depression during which a steep increase in dereliction frequentness took place for American
businesses.

When originally formulated, the Altman Z Score model was designed for manufacturing
companies with means of over$ 1 Million and didn't include private companies, nor
nonmanufacturing companies, nor public manufacturing companies with means lower than$ 1
Million.

still, over the times, the Z- Score Formula was acclimated by Edward Altman to suit other types
of associations and asset classes. The model that was designed when contriving a weighting
system in 1968, let Altman come up with three separate Z- Score models grounded on different
types of business but the first model released in 1968 only provisioned to public manufacturing
companies with means over$ 1 million. It was after a long delay of 15 times that Altman
released two other models which applied to non-publicly traded companies as well as lower
private manufacturers and to include further variables and expansive systems.

25
History of Edward Altman
Edward Altman is considered a colonist in the field of ruin vaticination and credit threat
operation and is credited with the famed and extensively used formula known as the Altman Z
Score formula or model which he published in the time 1968 for prognosticating ruin using
statistical system and discriminant analysis.

Edward Altman

Altman and his PhD pupil professor Edith Hotchkiss are also credited with coining the term
Chapter 22 which is now popularly appertained by companies while filing for ruin more than
formerly. During the same times, that's 1990s, he's also credited with defining the term ‘worried
debt securities’ for bonds which yield further than the ‘threat free’ ten percent handed by
government bond rates.

While not important is known about his particular life, it's known that he's the family of Ellen
Altman Stein who holds an MBA in Special Education and Stuart Altman, a well- known health
care economist. Born on 5th June, 1941, Edward Altman is presently a professor of Finance,
Emeritus at Stern School of Business (New York University). Altman holds a Ph.D. in Finance
and an MBA from UCLA and a B.A. in Economics from CCNY. Altman is considered an
authority figure in the finance and ruin sector and is a leading academic on Worried Debt
requests, High Yield Debt requests, erecting models of credit threat operation and ruin
vaticination.

Altman also used to educate the same in the Risk Management Open Enrolment program for
Stern Executive Education, the TRIUM Global Execute MBA program, HEC School of
Management, the (MSGF) Master of Science in Global Finance, the London School of
Economics, the (MSRM) Master of Science in Risk Management Program for directors offered
by HKU of Science and Tech and NYU Stern, where he has been a member of the faculty since
1967.

Altman has also entered numerous accolades and correctly so for his outstanding benefactions.
In 2001, he was instated into the Hall of Fame for The Fixed Income Society and in 2008 in
the Hall of Fame for 19 the Turnaround Management as an initial draftee. He has entered also
entered memorial Doctorates from the Lund University, Sweden in 2011 and the Warsaw
26
School of Economics, Poland in 2014. When it comes to memorial achievements, Altman was
also named as the Honorary Professor by the University of Buenos Aires, Argentina in 1996
and in 2017 by the Vigo University, Spain. He has co-founded the International Risk
Management conference in the time 2007 and was also chosen as one the ‘100 utmost
Influential People in Finance’ by the Treasury of Risk Management magazine in 2005.

Altman has also penned,co-authored or edited over 25 books with the maturity of them being
primarily in the threat operation sector. Some of the crucial titles being ‘Managing Credit Risk,
2nd Edition. (John Wiley and Sons) ’ ‘ Commercial fiscal torture and ruin, 3rd edition.( John
Wiley and Sons.) ’ and ‘ Bankruptcy, Credit Risk and High Yield ‘ Junk ’ Bonds A florilegium
of Jottings.( Oxford, England and Malden, Massachusetts Blackwell Publishing.) ’ to just name
a many.

Overall, one can say the donation of Edward Altman’s work to the field of finance and fiscal
education is vast and the finance and threat operation sector will be indebted to his work for
times to come especially through the use of his Z Score formula which is presently being used
and will continue to be used for times to come.

27
LIST OF BANKS SELECTED
Background of the companies,

is a large private sector bank in India offering a diversified

portfolio of financial products and services to retail, SME and corporate customers. The Bank
has an extensive network of branches, ATMs and other touch-points. Company has delivered
good profit growth of 19.8% CAGR over last 5 years. Stock is trading at 3.43 times its book
value. Company has low interest coverage ratio. The company has delivered a poor sales
growth of 9.38% over past five years. Company has a low return on equity of 12.4% over last
3 years. Contingent liabilities of Rs.46,27,574 Cr. Company might be capitalizing the interest
cost. Earnings include another income of Rs.64,210 Cr.

was amongst the first to receive an 'in principle' approval

from the Reserve Bank of India (RBI) to set up a bank in the private sector. HDFC Bank is a
publicly held banking company, the bank was incorporated in August 1994 in the name of
'HDFC Bank Limited', with its registered office in Mumbai, India. It is engaged in providing
a range of banking and financial services including retail banking, wholesale banking and
treasury operations. It is promoted by HDFC Ltd. which has 19.32% stake as on September
30, 2020. Currently, HDFC Bank Ltd. (HBL) is the largest private sector bank in India.
Company has delivered good profit growth of 20.0% CAGR over last 5 years. Stock is trading
at 3.79 times its book value. Company has low interest coverage ratio. Contingent liabilities
of Rs.14,57,166 Cr. Company might be capitalizing the interest cost. Earnings include another
income of Rs.32,688 Cr.

was incorporated in 1994 as a commercial bank

under the Banking Regulation Act, 1949. The Bank is publicly held and provides a wide range
of banking products and financial services to corporate and retail clients besides undertaking
treasury operations. The Bank operates in India including at the International Financial Service
Centres in India. Company's median sales growth is 20.0% of last 10 years. Company's
working capital requirements have reduced from 114 days to 79.3 days. Company has low
interest coverage ratio. Promoter holding is low: 15.9%. Company has a low return on equity
28
of 10.3% over last 3 years. Contingent liabilities of Rs.9,53,434 Cr. Company might be
capitalizing the interest cost. Promoters have pledged 45.5% of their holding. Earnings include
another income of Rs.7,916 Cr. Dividend pay-out has been low at 9.30% of profits over last 3
years.

is engaged in the business of Banking Services. IDFC FIRST

Bank was founded by the merger of Erstwhile IDFC Bank and Erstwhile Capital First on
December 18, 2018. Promoter holding has increased by 3.52% over last quarter. Though the
company is reporting repeated profits, it is not paying out dividend. Company has low interest
coverage ratio. Company has a low return on equity of -4.23% over last 3 years. Contingent
liabilities of Rs.2,15,754 Cr. Company might be capitalizing the interest cost. Earnings include
another income of Rs.3,901 Cr.

(‘the Bank’) was incorporated in 1931 as Travancore

Federal Bank Limited. It provides retail and corporate banking, para banking activities such
as debit card, third party product distribution etc., treasury and foreign exchange business.
Company has low interest coverage ratio. The company has delivered a poor sales growth of
10.4% over past five years. Company has a low return on equity of 10.9% over last 3 years.
Contingent liabilities of Rs.43,945 Cr. Company might be capitalizing the interest cost.
Dividend pay-out has been low at 9.20% of profits over last 3 years.

29
 DATA ANALYSIS AND INTERPRETATION

The data comported of 5 Indian banks, of which private sector banks. The stability index chosen
as the standard of torture for the purposes of this paper are the NPAs. The nature of data used
is Secondary data, as the fiscal numbers used in the construction of fiscal rates are taken from
the audited and published fiscal statements of the separate banks. These numbers are nominated
in Crores of INR( Indian Rupees). The time ending date of all fiscal documents used in this
process was the 31st March for each time of reference, as in India a fiscal time begins from 1st
April to 31st March.

ALTMAN Z SCORE conception was acclimated to the business and finance world byDr.
Edward Altman who used it to prognosticate the liability that a company would go void. His
computation called Altman Z score, totalities several weighted fiscal rates and compares it to
a graded scale. The lower the score, the more likely to company is to declare ruin.
Let’s look at how to calculate
Z- score Altman Z- score = 6.56 (working capital/ total means) + 3.26 (retained earnings
total means) + 6.72 (EBIT/ total means) + 1.05(request value of equity/ book value of
debt).
A- (Current means − Current arrears) Total means
B- Retained Earnings Total means
C- Earnings before Interest and levies Total means
D- Book Value of Equity/ Total arrears
The Altman Z- Score is a extensively used metric with wide operations. It's one of the several
as you can see, the Altman score weights different profitability and liquidity criteria to arrive
at the overall score. This overall score is also compared to the following grading scale.

➢ 0 –1.8 indicates the company will declare ruin in the future.

➢ -3 indicates the company is likely to declare ruin.
➢ 3 indicates the company is won't declare ruin.
According to the exploration we will take a deep look into 6 private banks, the 6 banks are as
follows-
PRIVATE BANKS-

❖ ICICI BANK

30
 ❖ HDFC BANK
❖ IndusInd Bank Ltd.
❖ IDFC First Bank Ltd.
❖ Federal Bank Ltd.

To calculate Z- score we need to know current working capital of the company, its total means
and arrears, quantum of rearmost retained earnings as well as earnings before interest duty. Z-
score can before interest and duty. Z- Score can be used to compare the odds of ruin of
companies in a analogous line of business or enterprises operating in the same assiduity.
Companies with Z- scores above3.1 are generally considered to be stable and healthy with a
low probability of ruin. Score that falls between1.8 and3.1 taradiddle in a so- called ‘ slate area
’ with scores of lower than 1, indicating the high probability of torture. Z score is used
extensively by fiscal adjudicators, accountants, plutocrat directors, loan processers, wealth
counsels, as well as day dealers. In the last 25 times, numerous fiscal models that use z score
has been proved to be successful as a predicator of commercial ruin.

31
 ATLMAN Z SCORE OF PUBLIC BANKS
ICICI bank
Ratios 2022 2021 2020 2019 2018
Total Assets-Total Liabilities 1411297.74 1230432.68 1098365.15 964459.15 879189.16
Working Capital/Total Assets 1022700.13 881498.19 792428.39 710943.58 638095.07
Retained Earnings/Total
Assets 168855.59 146122.67 115206.16 107073.91 103867.56
EBIT/Total Assets 78158.76 76525.96 69632.53 59824.29 56681.58
Book Value of Equity/Total
Liabilities 240.4 208.81 175.17 163.38 158.91

Altman Z-score 5.52 5.50 5.50 5.61 5.58

INTERPRETATION:

• Working capital to total assets, which indicates the bank's ability to cover its short-term
obligations with its working capital. The ratio has shown a consistent increase from
2018 to 2022, suggesting improved liquidity and ability to meet short-term obligations.

• Retained earnings to total assets, which indicates the bank's reinvestment of earnings
into its assets. The ratio has been increasing over the years, indicating that the bank is
retaining more earnings for future growth and investment.

• The profitability of the bank's assets, calculated as earnings before interest and taxes
(EBIT) divided by total assets. The ratio has shown some fluctuations over the years,
but overall, it has remained relatively stable.

• Book value of equity to total liabilities, which indicates the bank's equity position in
relation to its liabilities. The ratio has been increasing steadily over the years, indicating
growth in the bank's equity position in relation to its liabilities.

• The Altman Z-score is a measure of a company's financial health and bankruptcy risk.
A higher Z-score indicates lower bankruptcy risk. The Altman Z-score has remained

32
relatively stable around 5.5 over the years, suggesting a relatively low bankruptcy risk
for ICICI Bank.

33
 HDFC Bank
Ratios 2022 2021 2020 2019 2018
Total Assets-Total Liabilities 2466081.48 2068535.05 1746870.52 1530511.26 1244540.69
Working Capital/Total
Assets 1522508.22 1225630.76 1066858.29 894814.52 772363.16
Retained Earnings/Total
Assets 279641.05 239538.38 203169.55 170437.7 148661.69
EBIT/Total Assets 119820.83 113340.49 107375.94 90478.57 72771.28
Book Value of Equity/Total
Liabilities 432.95 369.54 311.83 547.89 409.6

Altman Z-score 4.75 4.63 4.80 4.60 4.85

INTERPRETATION:

• Working Capital ratio represents the proportion of working capital to total assets, which
indicates the bank's ability to cover its short-term obligations with its working capital.
The ratio has shown consistent improvement over the years, suggesting improved
liquidity and ability to meet short-term obligations.

• Retained Earnings represents the proportion of retained earnings to total assets, which
indicates the bank's reinvestment of earnings into its assets. The ratio has been
increasing over the years, indicating that the bank is retaining more earnings for future
growth and investment.

• EBIT/Total Assets: This ratio represents the profitability of the bank's assets, calculated
as earnings before interest and taxes (EBIT) divided by total assets. The ratio has shown
a consistent increase from 2018 to 2022, indicating improved profitability of the bank's
assets.

• Book Value of Equity/Total Liabilities: This ratio represents the proportion of book
value of equity to total liabilities, which indicates the bank's equity position in relation
to its liabilities. The ratio has shown some fluctuations over the years, with a decrease
in 2021, but has increased in 2022.

34
• The Altman Z-score is a measure of a company's financial health and bankruptcy risk.
A higher Z-score indicates lower bankruptcy risk. The Altman Z-score has shown some
fluctuations over the years, but has remained relatively stable around 4.6 to 4.85,
indicating moderate to low bankruptcy risk for HDFC Bank.

35
 IndusInd Bank Ltd.
Ratios 2022 2021 2020 2019 2018
Total Assets-Total Liabilities 401974.58 362972.75 307057.55 277819.42 221626.16
Working Capital/Total Assets 315882.33 279389.1 235699.8 207898.83 162354.42
Retained Earnings/Total
Assets 46906.49 42586.63 33329.66 26072.1 23226.85
EBIT/Total Assets 28660.2 27198.58 27496.79 21503.19 16439.41
Book Value of Equity/Total
Liabilities 611.54 556.61 485.97 437.2 390.94

Altman Z-score 6.02 5.94 5.99 5.74 5.65

INTERPRETATION:

• Working Capital represents the proportion of working capital to total assets, which
indicates the bank's ability to cover its short-term obligations with its working capital.
The ratio has shown consistent improvement over the years, suggesting improved
liquidity and ability to meet short-term obligations.

• Retained Earnings represents the proportion of retained earnings to total assets, which
indicates the bank's reinvestment of earnings into its assets. The ratio has been
increasing over the years, indicating that the bank is retaining more earnings for future
growth and investment.

• EBIT/Total Assets represents the profitability of the bank's assets, calculated as

earnings before interest and taxes (EBIT) divided by total assets. The ratio has shown
some fluctuations over the years, but overall, it has remained relatively stable,
indicating consistent profitability of the bank's assets.

• Book Value of Equity/Total Liabilities represents the proportion of book value of equity
to total liabilities, which indicates the bank's equity position in relation to its liabilities.

36
 The ratio has shown an increasing trend over the years, indicating improved equity
position in relation to liabilities.

• The Altman Z-score is a measure of a company's financial health and bankruptcy risk.
A higher Z-score indicates lower bankruptcy risk. The Altman Z-score has been
relatively stable around 5.65 to 6.02, indicating low bankruptcy risk for IndusInd Bank
Ltd.

37
 IDFC First Bank Ltd.
Ratios 2022 2021 2020 2019 2018
Total Assets-Total Liabilities 190181.61 163143.88 149200.4 167184.86 126520.18
Working Capital/Total Assets 132094.39 105604.24 91405.45 99196.07 58756.14
Retained Earnings/Total Assets 14769.65 12131.95 10532.7 13377.59 11852.46
EBIT/Total Assets 10750.27 11128.28 12168.73 7000 8395.3
Book Value of Equity/Total
Liabilities 33.75 31.37 31.9 37.98 44.82

Altman Z-score 5.19 4.95 4.80 4.43 3.80

INTERPRETATION:

• Working Capital/Total Assets represents the proportion of working capital to total

assets, which indicates the bank's ability to cover its short-term obligations with its
working capital. The ratio has shown an improving trend over the years, indicating
better liquidity and ability to meet short-term obligations.

• Retained Earnings/Total Assets represents the proportion of retained earnings to total

assets, which indicates the bank's reinvestment of earnings into its assets. The ratio has
shown an increasing trend from 2018 to 2022, indicating that the bank is retaining more
earnings for future growth and investment.

• EBIT/Total Assets represents the profitability of the bank's assets, calculated as

earnings before interest and taxes (EBIT) divided by total assets. The ratio has shown
some fluctuations over the years, with a decline in 2022 compared to previous years,
indicating potentially lower profitability of the bank's assets.

• Book Value of Equity/Total Liabilities represents the proportion of book value of equity
to total liabilities, which indicates the bank's equity position in relation to its liabilities.
The ratio has shown a declining trend over the years, indicating potentially weaker
equity position in relation to liabilities.

38
• The Altman Z-score is a measure of a company's financial health and bankruptcy risk.
A higher Z-score indicates lower bankruptcy risk. The Altman Z-score has shown some
fluctuations over the years, but overall, it has remained above 4.0, indicating moderate
to low bankruptcy risk for IDFC First Bank Ltd.

39
 Federal Bank Ltd.
Ratios 2022 2021 2020 2019 2018
Total Assets-Total Liabilities 220946.31 201367.39 180638.05 159339.99 138313.95
Working Capital/Total Assets 176074.13 160159.25 140807.45 123712.2 104497.78
Retained Earnings/Total Assets 18373.33 15724.38 14119.08 12876.03 11815.81
EBIT/Total Assets 11456.65 12011.09 11766.55 10005.78 8461.08
Book Value of Equity/Total
Liabilities 89.36 80.75 72.83 66.84 61.89

Altman Z-score 5.85 5.87 5.81 5.78 5.65

INTERPRETATION:

• The proportion of working capital to total assets, which indicates the bank's ability to
cover its short-term obligations with its working capital. The ratio has shown a
fluctuating trend over the years, but overall, it has remained at a relatively high level,
indicating good liquidity and ability to meet short-term obligations.

• The proportion of retained earnings to total assets, which indicates the bank's
reinvestment of earnings into its assets. The ratio has shown an increasing trend over
the years, indicating that the bank is retaining more earnings for future growth and
investment.

• The profitability of the bank's assets, calculated as earnings before interest and taxes
(EBIT) divided by total assets. The ratio has shown some fluctuations over the years,
but overall, it has remained at a moderate level, indicating potential profitability of the
bank's assets.

• The proportion of book value of equity to total liabilities, which indicates the bank's
equity position in relation to its liabilities. The ratio has shown an increasing trend over
the years, indicating potential strengthening of the bank's equity position in relation to
liabilities.

40
• The Altman Z-score is a measure of a company's financial health and bankruptcy risk.
A higher Z-score indicates lower bankruptcy risk. The Altman Z-score has shown some
fluctuations over the years, but overall, it has remained above 5.0, indicating moderate
to low bankruptcy risk for Federal Bank Ltd.

41
 ALTMAN Z-SCORE
2022 2021 2020 2019 2018

6.02

5.99
5.94

5.87
5.85

5.81
5.78
5.74
5.65

5.65
5.61
5.58
5.52
5.50
5.50

5.19
4.95
4.85
4.80

4.80
4.75
4.63

4.60

4.43
3.80
ICICI BANK HDFC BANK INDUSIND BANK IDFC FIRST BANK FEDERAL BANK
LTD. LTD. LTD.

INTERPRETATION:
The Altman Z-score is a measure of a company's financial health and bankruptcy risk, with
higher scores indicating lower bankruptcy risk. Here is the interpretation of Altman Z-scores
for the given banks for the years 2018-2022:

1. ICICI Bank: The Altman Z-score has ranged from 5.50 to 5.61 over the years, indicating
moderate to low bankruptcy risk.

2. HDFC Bank: The Altman Z-score has ranged from 4.60 to 4.85 over the years, indicating
moderate bankruptcy risk.

3. IndusInd Bank Ltd.: The Altman Z-score has ranged from 5.65 to 6.02 over the years,
indicating moderate to low bankruptcy risk.

4. IDFC First Bank Ltd.: The Altman Z-score has ranged from 3.80 to 5.19 over the years,
indicating moderate to high bankruptcy risk.

5. Federal Bank Ltd.: The Altman Z-score has ranged from 5.65 to 5.87 over the years,
indicating moderate to low bankruptcy risk.
Overall, based on the Altman Z-score, all the banks have generally shown moderate to low
bankruptcy risk, with some fluctuations over the years. However, it's important to consider

42
other relevant factors and conduct a comprehensive analysis of the banks' financial statements
and performance before making any investment or financial decisions.

ICICI Bank, HDFC Bank, IndusInd Bank Ltd., IDFC First Bank Ltd. and Federal Bank Ltd.
shows positive trends in terms of net assets, liquidity, profitability, equity position, and
relatively low bankruptcy risk. However, it's important to conduct a comprehensive analysis of
the all five bank's financial statements and performance in conjunction with other relevant
factors before making any investment or financial decisions.

43
 Conclusions

Financial health of Indian banks: Altman Z score is a widely used tool for assessing the
financial health and bankruptcy risk of companies, including banks. The analysis of Altman Z
scores in the Indian banking sector provides insights into the overall financial stability and risk
profile of Indian banks.

Monitoring and management of financial risks: Altman Z scores can serve as an important
tool for monitoring and managing financial risks in the Indian banking sector. Banks with lower
Z scores may need to implement measures to improve their financial health, such as
strengthening their capital adequacy, improving asset quality, and managing liquidity and
operational risks effectively.

Importance of risk management practices: The analysis of Altman Z scores highlights the
importance of robust risk management practices in the Indian banking sector. Banks need to
have effective risk management frameworks in place, including credit risk management,
market risk management, operational risk management, and liquidity risk management, to
ensure their financial stability and mitigate the risk of bankruptcy.

Regulatory oversight: The findings of the analysis of Altman Z scores in the Indian banking
sector emphasize the need for continued regulatory oversight and supervision of banks to
ensure their financial stability and mitigate systemic risks. Regulatory authorities should
closely monitor the financial health of banks using tools like Altman Z scores and take
appropriate actions to address any identified weaknesses.
The analysis of Altman Z scores in the Indian banking sector provides insights into the
financial health and bankruptcy risk of banks and underscores the importance of robust risk
management practices and regulatory oversight in the management of financial risks. Banks
should use this analysis as a basis for identifying areas of improvement and implementing
measures to enhance their financial stability and mitigate risks. Regulatory authorities should
also continue to monitor the financial health of banks and take appropriate actions to maintain
the stability and resilience of the Indian banking sector.

44
 Findings and Recommendation

1) Strengthen Credit Risk Management: Credit risk, which refers to the risk of borrowers
defaulting on their loan obligations, is a significant financial risk faced by banks. To
enhance credit risk management in the Indian banking sector, banks should:
i) Conduct thorough credit assessments: Banks should implement robust credit
assessment processes that include comprehensive credit evaluations of borrowers'
financial health, repayment capacity, and collateral valuation. This will help in
identifying and mitigating potential credit risks at an early stage.

ii) Diversify loan portfolios: Banks should avoid concentration risk by diversifying
their loan portfolios across different industries, sectors, and regions. This will
reduce the impact of credit defaults in any particular segment, reducing the overall
credit risk exposure.

iii) Monitor and manage non-performing assets (NPAs): Banks should have effective
mechanisms in place to monitor and manage NPAs, including timely identification,
classification, and provisioning for NPAs as per regulatory guidelines. This will
help in reducing the impact of NPAs on the bank's financials and overall credit risk
exposure.

2) Enhance Market Risk Management: Market risk, which refers to the risk of losses arising
from changes in market prices of financial instruments, is another important financial risk
faced by banks. To enhance market risk management in the Indian banking sector, banks
should:
i) Implement robust risk measurement models: Banks should use sophisticated risk
measurement models to assess market risk accurately. This should include stress
testing and scenario analysis to capture extreme market events that may impact the
bank's portfolio.
ii) Diversify investment portfolios: Banks should diversify their investment portfolios
across different asset classes, geographies, and instruments to reduce the impact of
market volatility on the overall portfolio.

45
 iii) Stay updated with market developments: Banks should have a strong market
intelligence system in place to stay updated with the latest market developments
and adjust their risk management strategies accordingly.

3) Strengthen Operational Risk Management: Operational risk, which refers to the risk of
losses arising from internal operational failures, is another critical financial risk faced by
banks. To enhance operational risk management in the Indian banking sector, banks should:
i) Implement robust internal controls: Banks should implement robust internal control
mechanisms, including segregation of duties, regular audits, and risk assessments,
to mitigate operational risks.

ii) Invest in technology and infrastructure: Banks should invest in modern technology
and infrastructure to streamline their operational processes, reduce manual errors,
and enhance data security.

iii) Develop a strong risk culture: Banks should develop a strong risk culture that
encourages proactive risk identification, reporting, and mitigation at all levels of the
organization. This includes providing regular training and awareness programs to
employees on operational risk management.

4) Strengthen Liquidity Risk Management: Liquidity risk, which refers to the risk of not
being able to meet financial obligations as they fall due, is another critical financial risk
faced by banks. To enhance liquidity risk management in the Indian banking sector, banks
should:
i) Maintain adequate liquidity buffers: Banks should maintain adequate liquidity
buffers, including cash reserves, high-quality liquid assets, and access to funding
sources, to meet their short-term and long-term liquidity requirements.

ii) Develop contingency funding plans: Banks should develop contingency funding
plans that outline strategies to manage liquidity during stressed situations, including
access to emergency funding sources and alternative liquidity options.

46
 iii) Monitor and manage funding sources: Banks should have effective mechanisms in
place to monitor and manage their funding sources, including diversification of
funding sources and monitoring of maturity profiles of liabilities.

In conclusion, enhancing the understanding and management of financial risks in the Indian
banking sector requires robust risk management practices, including credit risk, market risk,
operational risk, and liquidity risk management. By implementing the recommendations.

47
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• https://economictimes.indiatimes.com/hdfc-bank-ltd/balancesheet/companyid-9195.cms
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• https://economictimes.indiatimes.com/federal-bank-ltd/balancesheet/companyid-9211.cms

49
 Annexure
Plagiarism Report

50
51