Predictive Ability of Relative Solvency Ratio for Assessing the Probability of Default in Indian Textile Firms

Indian textile industry is one of the biggest in the world with a huge raw material and textiles manufacturing base. It contributes to 14% of India’s Manufacturing value-addition. But it is also burdened with many problems like outstanding credit and high level of bank loans. It is facing tough competition from countries like Bangladesh and Vietnam, resulting in lowering the demand along with inconsistent profitability and below average returns. This paper attempts to assess the financial distress among Indian textile firms. Enyi’s RSR model,a solvency management model,provides the framework for gauging the financial performance of firms using parameters like operational breakeven point, working capital required at operational breakeven point and possibility of insolvency in terms of production cycles.The paper applies the model on select 11 textile firms which were given a default rating by CRISIL in 2016. The results clearly indicate that Enyi’s RSR model works effectively and performs well in identifying default and also in predicting prior period distress leading to default state