Credit Default Analytics in Banks Using Altman Z score

The fundamental valuation in a bank is concerned primarily with its on-balance sheet activities such as lending, deposit taking and investing in bonds. Besides this, the banks enter into off-balance-based activities such as asset management, private banking, corporate advisory services, derivatives, letter of credits and bank guarantees. Loan pricing, loan provisions on performing loans and estimation of the probabilities of default would be determining the credit default risk. Whatever be the reason, solvency or risk-adjusted performance evaluation is the key determining factor in terms of solvency by a sound methodological tool, Z score is invariably a strong tool to measure credibility of the firms/Banks/Financial sectors. This study tries to examine the strength of credit portfolios by the major banks of India by the means of Altman Z-score model of bankruptcy over the period of 2006–2015. The study tries to observe the Z score for predicting bankruptcy across 10 banks including 5 public and 5 private sector banks. It is observed that most of the banks scoring decent Z score are far off from the level of bankruptcy and fall off in non-default group. Also most of the banks have shown a marginal appreciation in Z value. The scores of both public and private banks are comparable with public sector having an edge over private sector banks.