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Risk Management in Indian Banks: An Evaluation through Z Risk Index
Article · January 2015

DOI: 10.5958/2249-7323.2015.00133.9
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Asian Journal
Asian Research Consortium of Research in

Banking
and
Asian Journal of Research in Banking and Finance
Vol. 5, No. 11, November 2015, pp. 47-58. Finance
ISSN 2249-7323 www.aijsh.org
Risk Management in Indian Banks:

An Evaluation through Z Risk Index
Suksham R.Aneja*; Dr. Bhisham Kapoor**;

Dr. (Mrs) Anurag Pahuja***
*Research Scholar,
Mewar University,
Downloaded From IP - 122.180.105.90 on dated 9-Dec-2015
India.
Members Copy, Not for Commercial Sale
**Associate Professor,
www.IndianJournals.com
M.M.H. College,
Ghaziabad, India.
***Associate Professor,
IMS,
Ghaziabad, India.
DOI NUMBER: 10.5958/2249-7323.2015.00133.9
Abstract
Nothing is constant but risk in today’s dynamic environment. Banking is the business of risks and
all banks are exposed to a variety of risks viz. a viz. credit risk, liquidity risk, foreign exchange risk,
market risk and interest rate risk. It is very important to handle these risks in a pre-emptive,
proficient and cohesive manner to maintain sound financial health of a bank. The purpose of this
empirical study is to make an assessment as to how far Indian banks have been successful in
achieving their objectives of minimizing the negative effects that risks can put on the financial
results and capital of a bank. The need of the hour is an efficient risk management system
comprising risk identification, measurement and control. An effort has been made to assess the
financial health of the commercial banks in India by analyzing their riskiness and the probability of
being insolvent. The insolvency risk for 73 Indian banks (26 public sector banks, 20 private sector
banks and 27 selected foreign banks) using Z-Index along with the probabilistic prediction of their
book value bankruptcy over a period of nine years i.e. from 2005-06 to 2013-14 has been analyzed
and a comparative analysis among public, private and foreign banks to examine the probability of
their book value bankruptcy has been made.
47
Aneja et al. (2015). Asian Journal of Research in Banking and Finance,
Vol. 5, No.11, pp. 47-58.
Keywords: Risk Management, Z Risk Index, Insolvency Risk, Indian Banks, Public sector
banks, Pvt. sector banks.
________________________________________________________________________________
Introduction
Sound banking system is an important indicator of an economically strong nation, and Indian
banking has evolved through several distinct phases since independence. In order to make the
banks economically viable and financially strong, Government of India in consultation with RBI
have been taking, a series of major reformative measures such as interest rate deregulation,
introduction of prudential norms relating to income recognition, provisioning, capital adequacy,
emergence of new private sector banks, opening up of branches of foreign banks in India,
increasing use of technology, continuing mergers and acquisitions, modernizing backroom
operation and emphasis on customer satisfaction etc. Due to ever evolving financial institutions in
this dynamic environment, banks are confronted with various types of risks like credit risk,
liquidity risk, market risk, interest rate risk, etc., which are correlated and need to be handled in a
proactive, efficient and integrated manner so as to maintain, sound financial health. Indian banking
sector has seen many positive developments in the past by the policy makers and financial sector
regulatory authorities to bring an improvement in the regulation of the sector. Gone are the days
when typical bank’s business involved only accepting deposits and disbursement of advances.
Today's technology driven world provides International financial markets a showcase of
opportunities to banks for designing new instruments, products, and services in the financial world.
Such innovations like derivative products and securitization along with “off-balance-sheet”
financial instruments expose banks to major risks. These risks are not only correlated but
contagious as well as evidenced by the financial crisis which started from one country but affected
almost the whole world. Banks have flourished from being a financial intermediary into a risk
intermediary due to changes in the economic and regulatory scenarios banks operate in. This
process of financial intermediation exposes banks to severe competition and hence compels them to
encounter various types of financial and non-financial risks. Risks and uncertainties form an
integral part of banking which by nature entails taking risks. With each transaction that the bank
undertakes the risk profile of the bank evolves in new dimensions which needs to be tapped.
Risk management is a forward looking process, which involves decision making on an on-
going basis. The Basel Committee on Banking Supervision (BCBS) defines financial risk
management as “a sequence of four processes: the identification of events into one or more broad
categories of market, likewise, credit, operational and other risks (and then into specific sub-
categories); the assessment of risks using data and a risk model; the monitoring and reporting of the
risk assessments on a timely basis and control of these risks by senior management.
The purpose of implementing risk management in a bank is not to turn all professionals
into risk modellers rather it is to cultivate minimum understanding of risk models and techniques so
as to build up Risk oversight in them. Risk oversight entails awareness among bank professionals,
supervisors and standard setters, of risks rooted in the balance sheets and off balance sheets of the
banks. Risk oversight implies knowledge of risks, ability to anticipate adverse events and whenever
risks drift away the boundaries of permissible limits as per banks’ policies, risk manager knows the
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Vol. 5, No.11, pp. 47-58.
right time of enforcing risk controls and systems. In today’s IT world it is feasible theoretically as
well possible to build such risk processes, techniques and models through which Risk oversight and
risk controlling can be implemented. In this study an attempt has been made to measure Z risk
index score of Indian banks from 2006-2014 to analyse the effects of improvement in risk
management practices i.e. to understand whether better risk management practices are leading to
less risk. Section II presents the review of existing literature relating to risk management and Z Risk
Index particularly. Section III describes the research methodology adopted in this study. While
section IV is dedicated for analysing and interpreting the empirical observations, findings and
concluding remarks are depicted in section V.
Section II: Literature Review

This section covers important studies conducted in the field of risk management in India and
abroad, so as to give a better understanding of the concept and its appliocability in banking
industry.
The study by Cebenoyan & Strahan (2001) tried to test whether banks that were better able to trade
credit risks in the loan sales market experienced significant benefits. For this purpose the
researchers executed a series of cross-sectional, reduced form regressions to establish relationship
of capital structure, investments in risky loans, profits and risk to control variables with usage of
loan sales market by banks to foster risk management. Such relationship was clearly visible in the
research. However, on general level, the buy-sell banks appeared no safer and, perhaps, somewhat
riskier; but when compared to their peers, banks with similar operating and financial ratios, the
buy-sell banks exhibitted significantly lower risk. The study concluded that the benefits of
advances in risk management in banking will likely be greater credit availability rather than
reduced risk in the banking system.
Bichsel & Blum, 2001 investigated the relationship between changes in risk and changes in
accounting market data for risk and both accounting and market data for capital over the period
between 1990 and 1999, a positive correlation was found between changes in capital and changes
in risk, i.e., higher levels of capital were associated with higher levels of risk. Using monthly data
covering a period of 10 years between 1990 and 1999 for a sample of 18 publicly traded Swiss
banks; the authors examined the relationship between the leverage ratio and the risk of banks. A
positive correlation was found between changes in capital and risk. Despite the positive correlation
between risk and capital, no significant relationship was found between the default probability and
the capital ratio.
Naïmy, 2005 gauged the overall performance of the Lebanese Banks in terms of profitability and
risks for the period 1993 to 2002. He used Du Pont equation to measure profitability and risk index
suggested by Hannam and Hanweck (1988) to measure risk of Lebanese commercial banks so as to
evaluate the performance of this sector in terms of profitability and risks for the period 1993
through 2002. Despite a healthy banking management and relatively strong capitalization along
with rigorous control, the growth rate of the banking economic activity encountered a slowdown
since the beginning of the year 2000. Solvency and profitability of banks were threatened by
unexpected movements in interest rates or any political or regional shock. This study analyzed the
general performance of the Lebanese banking system and found that it was highly correlated with
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Vol. 5, No.11, pp. 47-58.
the economic situation of the country which was suffering from severe structural imbalances, an
increasing deficit, and a permanent deficit in the balance of trade.
Rahman et al., 2009 tried to investigate the impact of lending structure on the insolvency risk
exposure. For this a comparative analysis of insolvency risk behaviour between the Islamic and
conventional banks was made. The findings of this study was that the real estate lending was
positively related to the conventional banks’ risk, but inversely related to Islamic banks’ risk
exposure. A linear model was conducted using the generalised least squares (GLS) estimation to
test the risk behaviour of lending structure. Based on unbalanced panel data, three models were
analysed; namely, pooled effect (also known as none effect model), fixed effect, and random effect
model with an objective of examining the effect of lending structure on the insolvency risk
exposure of Islamic and conventional banks in Malaysia.
Sinha, Taneja and Gothi (2009) suggested that the framework developed by Hannan and Hanweck
(1988) was also relevant in the Indian context. The study explored a direct relationship between
risk and return indicating that increasing one will subsequently increase the other and vice versa.
Findings of this paper suggested that the most significant achievement of the financial sector
reforms had been the marked improvement in the financial health of commercial banks in terms of
capital adequacy, profitability and asset quality as also greater attention to risk management and
this improvement was visible in the form of increasing Z-statistic values obtained over years.
Coote, 2004 extended the economic framework used by Bichsel and Blum (2002) in examining the
relationship between bank capital and default risk. This paper provided an important variation of
the Bichsel and Blum (2002) study, which found a positive relationship between bank capital and
risk taking for Swiss banks based on data between 1990 and 2002 through an economic and
empirical framework. An option-based default metric was computed for Jamaican banks based on
Merton (1974) model for tracking the default experience for Jamaican banks over the period of
1996 to 2004. However, the study did not uncover a significant relationship between either bank
capital and asset risk or bank capital and the likelihood of default. Additionally, contrary to
previous research, it was found that a higher volatility in equity prices was associated with a lower
default probability.
Research gaps were identified in the light of the recent financial crisis in the US, India and
European countries which refocused attention on the financial health of commercial banks and
efforts have been made to measure the bankruptcy risk of Indian banks (public, private and foreign
sector) for a period of nine years (2005-06 to 2012-14) using a popular risk measure in the banking
and financial stability related literature called Z risk index that reflects a bank’s probability of
insolvency.
Section III: Objectives and Research Methodology

Primary objective of this study is to analyse whether regulatory risk management guidelines
provided at national and international levels have genuinely brought a decrease in the risk faced by
banks.
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Vol. 5, No.11, pp. 47-58.
The specific objectives of the study include the following:
1. To measure Z Risk index for public, private and selected foreign banks operating in India
during the period of 2006-2014.
2. To draw out a cross-sectional as well as longitudinal comparison of the probability of

insolvency amongst public, private and selected foreign banks operating in India on the
basis of data pertaining to the selected period.
In order to capture the overall risk of a bank, the standard deviation of ROA (return on assets) is a
good measure of the variability of ROA which provides a comprehensive measure that reflects not
only credit risk but also interest rate risk, liquidity risk and any other risk that is realized in bank
earnings (Sinha, et al., 2009,). To proceed with such analysis, Z risk index has been used as an
indicator which is a comprehensive measure of bank insolvency risk exposure.
Z Risk Index
The Z risk index as a measure of insolvency risk was suggested by Hannan and Hanweck (1988)
which was subsequently used by Liang & Savage (1990), Eisenbeis & Kwast (1991), Sinvey &
Nash (1993), Naimy (2005), Rahman, Ibrahim, Kameel & Meera (2009) and Sinha et al. (2010).
The Z statistic takes into consideration banks’ return on assets, volatility of return and the capital
base. In spite of its simplicity, it is widely used as it can be calculated using only accounting
information and thus applicable for both listed and unlisted financial institutions (Strobel, 2011).
Hannan and Hanweck’s probability of bankruptcy is based on the probability of return on assets
being negative and larger than the capital-asset ratio. Z risk index is a function of the normal profit
margin of the bank, the variation in that profit margin, and the equity capital available to absorb
that variation. In effect, the Z risk index measures the strength of the ROA capacity divided by the
number of standard deviations indicating how much ROA could be decreased without impacting
the capital base i.e. before the book equity capital of the bank would be exhausted. The Z risk index
attempts to capture the likelihood of a bank's earnings in a given year becoming low enough to
exhaust the bank's capital base and, thus, the likelihood of the bank becoming insolvent.The
relationship between the Z-ratio and the probability of bankruptcy is an inverse one, with higher Z-
ratios indicating a lower probability of bankruptcy.
Specifically, Z is defined as:
Where:
Return on Assets (ROA) = Net Income / Average of Total Assets.
Capital-to-Asset Ratio (CTA) = Equity/ Total Assets.
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Vol. 5, No.11, pp. 47-58.
As applied in studies conducted by Sinha, et al (2010) and Krishna Murari (2012), in the present
study instead of Total Assets, Risk weighted assets have been used which is Capital Adequacy
Ratio (CAR).
Higher values of Z imply lower insolvency risk because higher values of Z indicates higher levels
of equity and earnings as compared to a potential shock to the earnings denoted by variability in
return on assets of a bank. Thus, even if banks have wider access to funds invested in risky loan
portfolios they can maintain a low risk of insolvency as long as they are adequately capitalized.
Probabilistic Interpretation of Bankruptcy

Probability of book value insolvency (P) has been computed by applying the following formula:
P = 1/ [2Z2]
Where the multiplication by (1/2) reflects the fact that bankruptcy occurs only in the left tail of the
distribution. The relation of P to Z is inverse, with higher Z risk index indicating low probability of
bankruptcy and vice versa. One-period probability of insolvency could be calculated as a function
of the Z risk index while assuming that the potential ROAs of the business are normally distributed.
However, empirical studies (Sinha, et al, 2009) suggested that ROAs are not normally distributed,
but instead are “fat-tailed,” causing actual probability of insolvency to be higher. Reason behind
this might be that one-period probability may understate the true probability of insolvency as it
measures the risk of a single-period loss which might be so big that it wipes out equity. In practice,
insolvency often occurs after a sequence of smaller losses occurring over several periods, indicating
that serial correlation between negative shocks may exist.
Section IV: Data Analysis and Results
Measuring the Z Risk Index for Indian Banks
The present study is based on the observations of 73 Indian commercial banks, comprising of 27
Public Sector Banks (PSB), 20 Private Sector Banks (PrSB) and 27 Foreign Banks (FB). In this
study only those foreign banks have been considered which were operating in India during the
whole period of study i.e. from 2005-06 to 2012-14. The required secondary data was collected
from Performance Highlights of various banks as published by Indian Banking Association, (Indian
Banking Association) for a period of 9 years from 2005-06 to 2013-14.
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Vol. 5, No.11, pp. 47-58.
Table 1 Z Risk Index and Probability of Insolvency of Indian Banks on the

basis of financial results of banks from 2005-06 to 2013-14
Banks ROAµ CARµ ROAϭ Z P

Nationalised Banks (20) 0.00853 0.12570 0.00378 35.47592 0.00040
SBI Group (6) 0.00928 0.12655 0.00213 63.86803 0.00012
Public Sector Banks (26) 0.00861 0.12589 0.00347 38.75170 0.00033
Old Pvt. Banks(13) 0.01038 0.14813 0.00573 27.65114 0.00065
New Pvt. Banks(7) 0.01210 0.15154 0.00770 21.26416 0.00111
Private Sector Banks (20) 0.01098 0.14932 0.00652 24.59397 0.00083
Foreign Banks (27)* 0.02296 0.34019 0.06354 5.715399 0.015307
Note: * Those foreign banks have been considered which were operational in India during the
whole period of 2006-2014.
The Table 1 shows the Z-index and probability of bankruptcy (P) of PSB (Public Sector Banks),
PrSB (Private Sector Banks) and FB (Foreign Banks) during the period of 2005-06 to 2013-14. It is
evident from the table that average ROA of PSB (0.00861) is less than ROA of PrSB (0.01098).
However, ROA of Foreign banks (0.02296) is considerably higher. In case of CAR (Capital
Adequacy Ratio), significant higher value is observed for FB (0.34019) as compared to PrSB
(0.14932) and PSB (0.12589). But Z-statistic of FB (5.715399) is much lower than that of other two
bank groups i.e. PrSB (24.59397) and PSB (38.75170). This difference is due to the variability of
ROA as measured by the standard deviation. While standard deviation of ROA is only 0.00347 in
the case of PSB, it is a very high of 0.06354 for FB. It is also high in the case of PrSB (0.00652) as
compared to PSB. This significant difference in the variability of ROA leads to lower Z-statistic
despite higher ROA and CARof FB and PrSB. Thus, the observed Z risk index indicates that the
public sector banks are safer as compared to private sector banks and foreign banks.
The probability of bankruptcy, as shown in the table, also depicts the same. It can be mentioned
here that the findings of the present study support the findings of Sinha, et al (2010) and Krishna
Murari (2012). Among the public sector banks, average performance of State Bank of India (SBI)
group is better than the nationalized banks in terms of maintaining sound financial health as
indicated by Z risk index which for state bank group is found to be 63.86803, whereas it is 35.47592
for nationalized banks during the study period. By maintaining almost same capital base and same
average (ROAµ), SBG could improve its Z risk index by lowering variability of ROA being 0.00213
which is quite less than 0.00378 i.e. standard deviation of ROA of nationalised banks. Among the
private sector banks, though the probability of book value insolvency is lower for old private sector
banks (0.00065) than the new private sector banks (0.00111), but it is considerably higher than the
state bank group. The reason is same higher standard deviation of ROA denoting higher risk. Both
new and old private sector banks could not maintain a steady return on assets over the years leading
to higher standard deviation of ROA causing higher probability of insolvency.
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Vol. 5, No.11, pp. 47-58.
Table 2: Top Ten Banks with Highest Z-Index
SNo Name of the Bank ROAMEA CTAMEA ROAS.D Z P

N N .
1. The Federal Bank Ltd. (Old 0.01325 0.16826 0.00102 177.5472 0.00001
PrSB) 6 7 2 46 6
2. Shinhan Bank (FB) 0.01886 0.55318 0.00322 177.3868 0.00001
7 9 5 98 6
3. City Union Bank Ltd. (Old PrSB) 0.01561 0.13083 0.00091 160.8783 0.00001
1 3 0 21 9
4. State Bank of India (SBI) 0.00867 0.13013 0.00125 110.8029 0.00004
8 3 3 33 1
5. IDBI Ltd. (PSB) 0.00647 0.13064 0.00129 106.1260 0.00004
8 4 2 15 4
6. State Bank of Bikaner & Jaipur 0.00880 0.12734 0.00137 98.83460 0.00005
(SBG) 0 4 7 5 1
7. Syndicate Bank (Old PrSB) 0.00830 0.12218 0.00132 98.78154 0.00005
0 9 1 6 1
8. State Bank of Patiala (SBG) 0.00762 0.12504 0.00148 89.20202 0.00006

2 4 7 4 3
9. State Bank of Hyderabad (SBG) 0.01030 0.12853 0.00157 88.15925 0.00006

0 3 5 5 4
10. YES Bank (New PrSB) 0.01640 0.16433 0.00207 87.25887 0.00006
0 3 1 6 6
Table 2 depicts the top 10 banks out of the selected 73 banks with respect to Z risk index. It is
revealed through this table that The Federal Bank Ltd. seized first position with a very high Z-index
of 177.547246. Out of the top ten banks, four banks are Private Sector Banks, including one New
Private Sector banks and three old generation Private Sector Banks. On the other hand, State Bank
of India and three other banks from State Bank Group have made up to the list of top ten banks.
One Public Sector bank and one Foreign Bank are also in the list. In the similar study of (Murari,
2012) none of New private sector banks had been able to enter the list due to lower Z-index as
compared to other banks but now with better risk management practices YES bank has joined the
list. It signifies that some of the Banks have played exceptionally thriving in acting as financial
intermediary and supervising sound financial health, while others could not.
One more thing is clear from Table 2 that very high Z-index of The Federal Bank Ltd. is due to
lower variability of return (ROAS.D.). The average ROA of City Union Bank Ltd. (0. 0.015611) is
greater than that of The Federal Bank Ltd. (0. 013256), but the SD of ROA of the former bank
depicting risk is higher than the later. Similarly, in comparison to State Bank of Patiala (PSB) and
Syndicate Bank (PrSB), YES Bank, State Bank of Hyderabad (SBG) have much higher ROA as
well as CAR but still they rank lower in respect of Z-risk index due to higher Standard deviation of
ROA.
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Vol. 5, No.11, pp. 47-58.
Table 3. Year-wise Z Risk Index and Probability of Insolvency of Indian

Banks
Year Public Sector Banks Private Sector Banks Foreign Banks

(31 Z P Z P Z P
March)
2006 35.372803 0.000400 14.6778 0.002321 19.47233 0.001319
2007 53.653943 0.000174 30.05948 0.000553 21.66058 0.001066
2008 46.441750 0.000232 39.43146 0.000322 23.16467 0.000932
2009 44.474481 0.000253 25.24266 0.000785 14.89392 0.002254
2010 45.259118 0.000244 23.23071 0.000926 16.49538 0.001838
2011 50.831415 0.000194 33.17275 0.000454 27.17599 0.000677
2012 53.902062 0.000172 34.72208 0.000415 20.36242 0.001206
2013 56.447113 0.000157 29.90912 0.000559 15.97925 0.001958
2014 31.94555 0.00049 17.91747 0.001557 13.55922 0.00272
Year-wise Z risk index and probabilistic interpretation of book value insolvency for Indian banks,
as shown above in Table 3, reveals that Indian banks have shown a fluctuating trend during the
period of study in terms of financial stability. In case of PSB, Z risk index increased
from35.372803 in 2005-06 to 56.447113 in 2012-13 and again reduced to31.94555. Indeed, during
the tough time for the world with respect to financial crisis, the Z risk index for Indian PSB has
been almost consistent and went little down. In the case of PrSB, though Z risk index increased
from 14.6778 in 2005-06 to 17.91747in 2013-14, a fluctuating trend is seen over the years. For
instance, the highest Z-statistic is found in the year 2007-08(39.43146), but in the immediately
succeeding year, it came down to 25.24266 which showed the impact of the US subprime crisis.
The probabilityof insolvency for PrSB has been fluctuating within the limits during the period of
study. In thecase of FB, it increased from 19.47233 in 2005-06 to 23.16467 in 2008-09 with an
increasing trend, but it came down to 13.55922 in the last year of the study period after recording
an increase during medieval years. In the last year of study 2013-14 again risks have increased and
probability of insolvency has reduced. This change might be because of Indian economic crisis in
2013 which India had been facing persistently resulting in high current account deficits for many
years which. There has been increasing reliance on external capital flows in the form of debt and
equity to finance this deficit with short-term debt and fickle equity flows for several years. Besides
many corporates carry fair amounts of unhedged foreign exchange liabilities. Overall, a declining
probability trend for insolvency is observed for the PSB and PrSB during the study period as shown
in the Table 3. Foreign banks operating in India showed a little worrisome trend with respect to the
probability of book value insolvency which may be attributed to the small operational coverage in
India. A positive trend is found for all the bank groups in recent years indicating a good sign for
Indian commercial banks except foreign banks and however in the last year health of India’s
banking system showed a slowing economic growth and rapid currency depreciation depicting
higher risk.
Section V: Conclusion
Risk manager’s job is to adopt such policies and practices which minimizes risk for a given return.
Variation in the returns is a critical factor in judging the performance of risk management
55
Vol. 5, No.11, pp. 47-58.
department of the banks. To check such performance of risk management of banks Z risk index has
been used. As observed from the data analysis of present study insolvency risk of the public sector
banks is less as compared to private and foreign banks. Ave rag e performance of state bank group
is showing better performance as compared to the nationalized banks in terms of maintaining
sound financial health depicted by Z risk index. Except last year 2013-14 and years of US
subprime crisis, overall financial health seems to be strong for Indian banks as measured by Z risk
index which is showing overall an upward trend for all the bank groups. Financial health of banks
can be improved by reducing the variability of ROA which represents the risk. However different
results were noted for foreign banks’ financial performance which may be due to the fraction of
business they are doing in India as compared to their home country.
Scope for Future Resaerch

The study suggests that in order to improve their financial health, Indian banks need to reduce the
non-performing loans to a very negligible level and maintain a steady ROA and that's where
effective risk management has to come in action. However insolvency risk is becoming a matter of
serious concern for Indian banks as last financial year has seen a combination of growth weakening,
lower market confidence, more NPAs and further reductions in asset quality challenging their
resilience. Though at micro level, the risk and its management in banking industry has been gauged
in the paper, further studies can focus on various macro parameters along with micro factors to
have a holistic coverage.
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Risk Management in Indian Banks: An Evaluation through Z Risk Index

Article · January 2015

Dr. Anurag Pahuja

The user has requested enhancement of the downloaded file.

Asian Research Consortium of Research in

Risk Management in Indian Banks:

Suksham R.Aneja*; Dr. Bhisham Kapoor**;

DOI NUMBER: 10.5958/2249-7323.2015.00133.9

Section II: Literature Review

Section III: Objectives and Research Methodology

The specific objectives of the study include the following:

2. To draw out a cross-sectional as well as longitudinal comparison of the probability of

Specifically, Z is defined as:

Return on Assets (ROA) = Net Income / Average of Total Assets.

Capital-to-Asset Ratio (CTA) = Equity/ Total Assets.

Probabilistic Interpretation of Bankruptcy

Section IV: Data Analysis and Results

Measuring the Z Risk Index for Indian Banks

Table 1 Z Risk Index and Probability of Insolvency of Indian Banks on the

Banks ROAµ CARµ ROAϭ Z P

Table 2: Top Ten Banks with Highest Z-Index

SNo Name of the Bank ROAMEA CTAMEA ROAS.D Z P

8. State Bank of Patiala (SBG) 0.00762 0.12504 0.00148 89.20202 0.00006

9. State Bank of Hyderabad (SBG) 0.01030 0.12853 0.00157 88.15925 0.00006

Table 3. Year-wise Z Risk Index and Probability of Insolvency of Indian

Year Public Sector Banks Private Sector Banks Foreign Banks

Scope for Future Resaerch

K. N. Vaidyanathan, U. S. (2013, August). Risk Management 2.0. Chartered Secretary-The Journal

Naïmy, V. Y. (2005). Overall Lebanese Banks’ Performance: A Risk-Return Framework.

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