Determinants of Financial Distress: Evidence from the State-owned Commercial Banks in Bangladesh

Abstract

Banking sector is now facing a crisis moment due to some recent
scams, gradual rise up of nonperforming loans, weak corporate governance,
mountainous level of corruption, poor regulation and supervision and
insignificant legal enforcement against defaulters. Therefore, the survival of the
banking sector has become an important issue nowadays. This study
investigated the determinants of financial distress in State-Owned Commercial
Banks (SCBs) of Bangladesh. Data have been collected from the five SCBs of
Bangladesh for the period of 2009-2016 and a panel of 40 observations has
been formed. Altman’s Z-score is used as a measure of financial distress and
Pooled Ordinary Least Square (Pooled OLS) and Panel Corrected Standard
Errors (PCSE) methods have been applied to find out the significant
determinants of financial distress. The study observed that SCBs in Bangladesh
are financially distressed and are characterized by low capital adequacy ratio,
high loan loss provision, liquidity problem, poor earning quality and
management inefficiency. The regression results of PCSE indicates that
management efficiency, earning ability and lending risk are the significant
factors to determine financial distress in SCBs of Bangladesh whereas capital
adequacy, asset quality and macroeconomic variables have appeared to be
insignificant. This study suggests that improvement of governance in the
activities of SCBs and their compliance as recommended by the regulatory
frameworks will help to address the problems identified and bring a positive
change in the banking sector in the years to come.