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investment banking

investment banking

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Measuring Financial Distress of IDBI Using Altman Z-Score Model
-Krishna Chaitanya V 
In a recent move, the Reserve Bank of India has approved the merger of IDBI (IndustrialDevelopment Bank of India) and IDBI Bank, which will happen in the month of October 2005. It issaid that the merged entity would be the fifth largest bank in India after SBI (State Bank of India),ICICI (Industrial Credit and Investment Corporation of India), PNB (Punjab National Bank) andCanara Bank, in terms of total assets. The swap ratio is fixed at 1:1.42 and the government'sholding is all set to come down to 51.4% from the present 59%. Sources also revealed that thenew entity would have two strategic units: IDBI banking and IDBI development finance. But manyexperts do believe that this move of merging a weak organization with a stronger one is not agood strategy. In the light of the above, the present study attempts to examine the financialdistress of IDBI using the Altman Z-score model. Based on the study results, the paper alsofocuses on suggesting the appropriate strategy.
The major participants of the Indian financial system are the commercial banks; financialinstitutions (FIs), encompassing term-lending institutions; investment institutions; specializedfinancial institutions; and the state-level development banks, nonbank financial companies(NBFCs) and other market intermediaries such as the stockbrokers and moneylenders. Thecommercial banks and certain variants of NBFCs are among the oldest of the market participants.The FIs, on the other hand, are relatively new entities in the financial market place.The Indian financial system comprises the following institutions:1. Commercial Banksa. Public Sector Banksb. New Private Sector Banksc. Old Private Sector Banksd. Foreign Banks2. Cooperative Institutionsa. Urban Cooperative Banksb. State Cooperative Banksc. Central Cooperative Banks3. Financial Institutionsa. All India Financial Institutionsb. State level Financial Corporations
c. State Industrial development Corporations4. Non-Banking Finance Companies5. Capital Market IntermediariesAbout 85-90% of the country's banking segment is under State control, while the balancecomprises the private sector and foreign banks.
ole of Financial Institutions in India
The specialized financial institutions were established to resolve market failures in developingeconomies and shortage of long-term investments. The first financial institution to be establishedwas the Industrial Finance Corporation of India (IFCI) in 1948. This was followed by the StateFinancial Corporation (SFC) at the state level, which was set up under a special statute. In 1955,the Industrial Credit and Investment Corporation of India (ICICI) was set up in the private sectorwith foreign equity participation. This was followed in 1964 by the Industrial Development Bank of India (IDBI), which was set up as a subsidiary of the Reserve Bank of India (RBI). The threeinstitutions that dominate the term-lending market in providing financial assistance to thecorporate sector are IDBI, IFCI and ICICI.In India, financial institutions were established and developed by the Government of India andReserve Bank of India to meet the specific needs of industry and were traditionally engaged inlong- term financing, since their main objective was to take care of the investment needs of industries and to contribute to a better industrial climate.
ole of Commercial Banks in India
Traditionally, the commercial banks in India were largely into the core banking business of accepting deposits and providing working capital funds to agriculture and allied trade and industrysectors.At present, Indian banks are engaged in credit, consumer finance, savings, money and capital,advisory services and, recently, the insurance market.The traditional division between banks (as providers of working capital) and FIs (as providers of project finance) is increasingly getting blurred with the deepening of financial reforms andintegration of financial markets. The need was felt to gradually put in place a regulatoryframework which will facilitate eventually the transition to universal banking. The Reserve Bank of India undertook a number of policy measures relating to financial institutions during 1999-2000.One such option was the merging of financial institutions with strong and viable commercial banks.As a part of this strategy, ICICI was merged with the ICICI bank in the year 2001.In a recent move, the Reserve Bank of India has approved the merger of IDBI and IDBI bankwhich will happen in the month of October 2005. The modalities have also been worked out as theswap ratio is fixed at 1:1.42 and the government's holding is all set to come down to 51.4% fromthe present 59%. But many financial experts are arguing that this is not a goodstrategy becauseit does not make any logical sense of merging a weak organization with the stronger ones.
able 1:
oles of Commercial Banks and FinancialInstitutions (FIs)
Commercial Banking orSimilar in NatureInvestmentBankingOther FinancialServicesBanks Accepting chequabledeposits Granting loansand advances
Investments insecuritiesUnderwriting of issues Loansyndication
Factoring,Leasing, Hirepurchase,Mutual funds,Credit-cards,Merchantbanking,HousingFinanceFIs Granting long-termloans and advances,Granting short-termloans/advances/workingcapital finance,Accepting term-deposits and issuingCDs, etc.Underwritingandsubscribingdirectly toshares/bondsof corporates.Commercialbanking, Creditrating,Brokerage,H.F, M.Fs,Projectconsultancy,Registrarservices, etc.Notes:- Source:www.rbi.org.in- The activities are performed either directly or throughsubsidiaries.- FIs: Financial Institutions- CDs: Certificate of Deposits- M.Fs: Mutual Funds- H.F: Housing Finance
Objectives of the Study
In the light of the above discussion, an attempt has been made in this paper to predict theinsolvency of IDBI. Thus, the basic objectives of the study are:1. To find out the financial distress of IDBI using the Altman Z-Score model.2. To explore the signs of financial distress of IDBI and address the issue of the proposed mergerplan of IDBI with IDBI bank based on the results.

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