A comparative study of bank failure prediction models on Indian banks: Identifying appropriate models based on failure parameters

Abstract

Recently, Indian banks like Yes Bank, PMC Bank, LVB have collapsed, which affected investors, depositors, employees and shook the confidence of the public in Indian financial institutions. It also affected other industries, triggering financial distress. Specifically in Indian context, DICGC guaranteed the depositor liabilities up to Rupees One Lakh (at the time of failure oft he banks, now it is Rupees Five Lakhs). The insurance premium combined with CRR, SLR is low compared to the likes of depositor liabilities that need to be paid off in case of default. Banks deposits in India is comparable to social security, for maj ority of the population. l erefore, evaluating operational risks in banks and developing an early warning system is critical. This study uses recent data on Indian private and public sector banks and applies existing bank failure models to compare their effectiveness.