An MDA approach for early identification of firms requiring corporate debt restructuring

Abstract

When firms fail, their creditors usually suffer losses, so anything which increases the likelihood of corporate failures can heighten the risks faced by banking and financial system. This brunt was faced by banks and financial institutions in the beginning of 2000s when Indian corporates faced increasing challenges in meeting their debt servicing obligations. As high corporate debt overhang poses a risk to banks‘ balance sheets and financial stability due to increasing institutions witnessed an increasing trend. Although, huge amount of debt has been restructured by banks over the years, the data by RBI in 2015 indicated that the assets quality of Scheduled Commercial Banks (SCBs)was continuously deteriorating. Therefore, it makes sense to devise a system so that it is possible to identify firms that will need debt restructuring support due to high risk of being financially distressed in near future and thereby. The objective of this paper is to identify variables that are able to estimate the probability of a company of being financially distressed. The results indicate that profit before interest & taxes to sales, price to book value, debt-equity ratio, current ratio and asset turnover ratio were most significant predictors for firms requiring debt restructuring.