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<p>This study assesses the effect of internal financial determinants on banking distress in India, with a particular focus on the influence of CAMEL components on banking distress, as indicated by the Z-score based on Return of Assets (ROA) volatility. This study fills a methodological gap by addressing cross-sectional dependency while examining the influence of CAMEL components on banking distress in India. The analysis is performed using the secondary data taken out of Prowess IQ database of 30 Indian banks in the time span of 2009-10 to 2023-24. A panel-corrected standard error model was employed to derive effective and unbiased estimates. The result suggest that a combination of internal financial determinants significantly impacts banking distress. Capital adequacy, asset quality, management quality, and earnings positively and significantly influence the Z-score, implying that well-capitalized, effectively managed and highly profitable are more sustainable. However, liquidity shows a negative and significant relationship with the Z-score, suggesting that excessive liquidity beyond the optimum level increases the risk of banking distress. These results imply that banking institutions and regulatory bodies should optimize capital reserves, enhance managerial effectiveness and asset quality, and maintain an optimal balance between liquidity and profitability. Policymakers can use these insights to develop effective supervisory and regulatory policies for the banking sector. This study enriches the current literature by providing a broad understanding of the internal financial determinants of banking distress in the Indian banking industry.</p>

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Examining banking distress through the CAMEL model: panel data evidence from Indian banks

  • 期刊论文

  • 发表日期：

    2026年4月9日

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  • Farhaan Rashid,
  • Rafi Ahmad Khan,
  • Ishtiaq Hussain Qureshi

摘要

This study assesses the effect of internal financial determinants on banking distress in India, with a particular focus on the influence of CAMEL components on banking distress, as indicated by the Z-score based on Return of Assets (ROA) volatility. This study fills a methodological gap by addressing cross-sectional dependency while examining the influence of CAMEL components on banking distress in India. The analysis is performed using the secondary data taken out of Prowess IQ database of 30 Indian banks in the time span of 2009-10 to 2023-24. A panel-corrected standard error model was employed to derive effective and unbiased estimates. The result suggest that a combination of internal financial determinants significantly impacts banking distress. Capital adequacy, asset quality, management quality, and earnings positively and significantly influence the Z-score, implying that well-capitalized, effectively managed and highly profitable are more sustainable. However, liquidity shows a negative and significant relationship with the Z-score, suggesting that excessive liquidity beyond the optimum level increases the risk of banking distress. These results imply that banking institutions and regulatory bodies should optimize capital reserves, enhance managerial effectiveness and asset quality, and maintain an optimal balance between liquidity and profitability. Policymakers can use these insights to develop effective supervisory and regulatory policies for the banking sector. This study enriches the current literature by providing a broad understanding of the internal financial determinants of banking distress in the Indian banking industry.