In a recent move, the Reserve Bank of India has approved the merger of IDBI (Industrial Development Bank of India) and IDBI Bank, which will happen in the month of October 2005. It is said that the merged entity would be the fifth largest bank in India after SBI (State Bank of India), ICICI (Industrial Credit and Investment Corporation of India), PNB (Punjab National Bank) and Canara Bank, in terms of total assets. The swap ratio is fixed at 1:1.42 and the government's holding is all set to come down to 51.4% from the present 59%. Sources also revealed that the new entity would have two strategic units: IDBI banking and IDBI development finance. But many experts do believe that this move of merging a weak organization with a stronger one is not a good strategy. In the light of the above, the present study attempts to examine the financial distress of IDBI using the Altman Z-score model. Based on the study results, the paper also focuses on suggesting the appropriate strategy.

The major participants of the Indian financial system are the commercial banks; financial institutions (FIs), encompassing term-lending institutions; investment institutions; specialized financial institutions; and the state-level development banks, nonbank financial companies (NBFCs) and other market intermediaries such as the stockbrokers and moneylenders. The commercial banks and certain variants of NBFCs are among the oldest of the market participants. The FIs, on the other hand, are relatively new entities in the financial market place.

The specialized financial institutions were established to resolve market failures in developing economies and shortage of long-term investments. The first financial institution to be established was the Industrial Finance Corporation of India (IFCI) in 1948. This was followed by the State Financial Corporation (SFC) at the state level, which was set up under a special statute. In 1955, the Industrial Credit and Investment Corporation of India (ICICI) was set up in the private sector with foreign equity participation. This was followed in 1964 by the Industrial Development Bank of India (IDBI), which was set up as a subsidiary of the Reserve Bank of India (RBI). The three institutions that dominate the term-lending market in providing financial assistance to the corporate sector are IDBI, IFCI and ICICI.