Banks Merger GTB

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Global Trust Bank: Rise and Fall

Global Trust Bank (GTB) was the outcome of liberalization polices initiated by theGovernment of India during the 1990s. As the government allowed private entities in the

banking sector, GTB was established in the year 1994 with its registered office at

Hyderabad, the capital of the state of Andhra Pradesh, India. It was promoted by threeentrepreneurs with considerable experience in the banking sector.

The establishment of GTB was considered a major breakthrough in the Indian bankingsector. The high success rate during the initial years led GTB to become the first bank to

attract equity capital from international investment banks, such as International Finance

Corporation (IFC) and Asian Development Bank (ADB). The Initial public offering

(IPO) of the bank was oversubscribed 60 times. In the first five years of operations, the bank had total deposits worth Rs40 billion.

The fall of the banking entity began in the early 2000s. The Reserve Bank of India’s

(RBI) probe revealed irregular financial disclosures. Some of the major factors the led tothe fall of GTB are:

o Attempt to build a capital base from foreign investment failed.

o Nexus with Ketan Parekh, who was involved in one of the biggest stocks scandals

in India.

Global Trust Bank Merger

As Global Trust Bank collapsed, RBI announced its merger with the Oriental Bank of

Commerce (OBC). The bank took all the assets and liabilities of GTB, along with its 104 branches, 275 ATMs and a workforce of over 1400 employees. However, according to

the merger deal, GTB’s shareholders would not get OBC shares. OBC benefited hugely,

as its network and customer base expanded. It also earned tax benefits due to GTB’s large

amount of investment in non-performing assets (NPAs).

The deal was equally beneficial for GTB depositors, as they could now enjoy the trust of

a public sector bank. However, the Global Trust Bank saga created an environment of suspicion against private sector banks. This became one of the reasons for the immense

success of public sector banks in India.

INTRODUCTION

Following in the footsteps of United Industrial Bank, Benaras Bank, Nedungadi Bank and

Bank of Karad, Global Trust Bank too has fallen from grace. Helplessness was the apt

word to describe the feelings of the anxious depositors who thronged various branches of GTB after the moratorium was announced in the mass media on 24th July 2004.

One of the first new generation private banks, GTB was promoted by former Vysya Bank

Chairman Ramesh Gelli, a Padmashree awardee, and his associates. In addition to the 40



per cent contribution by the core promoters, the Bank had managed to rope in

International Finance Corporation (IFC) and Asian Development Bank (ADB) as the

other major shareholders of the Bank. GTB was the first bank to open for business after the RBI opened up the sector for private sector investment.

GTB FACT- FILE*Promoter Ramesh Gelli

1993-94 GTB gets private bank license, unveils IPOOctober 1994 Manmohan Singh inaugurates operations

October 1994 Commencement of operations

Equity capital Rs. 121 croresDeposits Rs. 6920 crores

Advances Rs. 3276 crores

Net loss Rs. 272 croresMarket capitalization Rs. 319 crores

Gross NPAs Rs. 915 crores

* Data as on March 31, 2003

GTB’s problems started during the stock scam period in 2000. Every investment

company of the Parekh group had an account at GTB and enjoyed generous funding bythe bank. GTB indulged in irregular lending to Ketan Parekh and several others . This

was highlighted by the RBI annual inspection of GTB in 1999-2000. RBI had further

pointed out that these investment companies mobilized large sums of money by way of

share applications and convertible debentures, and used that money to buy shares of GTB.

GTB signed a merger proposal with UTI Bank in January 2001 to create the largest private sector bank, but the proposed merger was mired in controversy. Ketan Parekh, the

prime accused in the stock scam, had artificially inflated GTB share prices through

generous loans from GTB. The merger proposal was later withdrawn and SEBIinvestigation later revealed that Ramesh Gelli (CMD of GTB) and Parekh had colluded to

inflate share prices so that the merger ratio became favorable to GTB.

In March 2002, GTB’s audited balance sheet for the year ended March 31 2002 showed a positive net worth of Rs. 400.4 crores. However, an inspection by the RBI revealed that

the net worth of the bank was in fact negative. In view of this significant variance in the

assessment of the bank’s financial position, the RBI appointed an independent CharteredAccountant to reconcile the differences. The report of the auditor in February 2003

confirmed the RBI’s assessment, except for minor differences.

The RBI now imposed curbs on GTB relating to certain types of advances, premature

withdrawal of deposits, dividend payout and its capital market exposure and began to

monitor the bank’s progress on a monthly basis. GTB was also advised to change itsstatutory auditors for the year 2002-03. In order to complete the statutory audit and assess



the steps to be taken to put GTB back on a sound financial track, the bank was given time

until September 30, 2003 to publish its correct accounts for the year ended March 31,

2003.

However, the bank’s operating profit was inadequate to meet the backlog of provisioning

requirements for its NPAs. GTB’s audited accounts for the year ended March 31 2003reported a marginally positive net worth, but yet again the RBI’s inspection showed that

the bank’s net worth had been eroded still further.

In November 2003, the RBI asked the GTB Board to infuse fresh capital to restore theBank’s Capital Adequacy Ratio to 9% and to initiate a time bound programme for its

revival.

In July 2004, GTB came up with a proposal by Newbridge Capital (an international private equity fund) for infusion of fresh capital, but the terms and conditions of the

restructuring plan were not acceptable to the RBI. The RBI finally decided to place the

bank under a three-month moratorium with effect from July 24, 2004. A moratorium

meant that the normal operations of the bank, viz. taking deposits and giving out loanswould be halted until a solution could be found to rejuvenate the bank. The moratorium

was aimed at freezing the assets and liabilities of the bank in order to protect its healthfrom further deterioration. The bank needed a fresh capital infusion of Rs. 700 - 800

crores mainly to write off the bad loans in its books.

TERMS OF THE MORATORIUM

Besides halting the normal business of the bank the other terms of the moratorium were

as follows:

1. The RBI imposed a ceiling on permitted withdrawals upto Rs. 10,000/- to ensure thatGTB branches were able to take care of the immediate needs of most of the depositors.

The RBI also disabled all the ATMs to prevent withdrawals in excess of Rs.10,000.00.

An amount not exceeding Rs. 1 lakh could be withdrawn for emergency purposes such asmedical treatment or education, obligatory expenses such as marriage or other

ceremonies and any other unavoidable emergencies (by application through RBI). No

fresh loans were permitted during the period of moratorium.

2. Withdrawals from salary accounts maintained with GTB were to be allowed under the

permitted withdrawal limit.

3. Further, depositors participants and locker deposit account holders and demat

accountholders would be allowed to operate their accounts.

NPAs created in the stock scam led to the downfall of one of India’s most hi-tech banks.

Indiscriminate lending to stockbrokers, diamond traders and exporters in Mumbai and

Hyderabad brought about the bank’s downfall. GTB shares, which were quoted at Rs.114in November 2000, crashed by 20% to end at Rs.13.17 on 24 July 2004.



In view of the mismanagement of the bank, SEBI Chairman G. N. Bajpai said

• Trading in the shares of GTB would not be suspended, but a close watch would bekept on trading in the counter.

•

The Stock Market regulator warned of severe regulatory action if there were anymanipulative operations in the demat accounts.

• The National Securities Depositories Ltd. (NSDL) advised GTB to appoint aConcurrent Auditor to oversee its depository operations for a period of six

months.

SEQUENCE OF THE FALL FROM GRACE

1999-2000 Links with Ketan Parekh

January 2001 GTB proposes merger with UTI Bank

April 2001 Deal called off after RBI steps in, Gelli ousted as CMD

June-July 2001 Gelli quits Board, JPC calls for probe.June 2002 RBI gives clean chit on GTB’s liquidity

February 2003 RBI’s assessment - negative net worth of GTB

2003-04 Bank’s net worth eroded further

July 2004 RBI rejects Newbridge Capital Infusion Plan

July 24 2204 Government notifies 3-month moratorium

After placing the bank under moratorium for three months, the Reserve Bank of India

acted quickly to safeguard the interests of the depositors and within 48 hrs of themoratorium, announced the merger of GTB with Oriental Bank of Commerce (OBC).

ORIGINS OF ORIENTAL BANK OF COMMERCEOriental Bank of Commerce (OBC) began its journey on February 19,1943 from Lahore.

After Partition, the bank shifted its headquarters to Amritsar, and still later its Head

Office was shifted to Delhi. The bank was nationalized in 1980.

MONEY MATRIX

Parameter Oriental Bank of Commerce Global Trust Bank

Advances (Rs. Crore) 19680.75 3275

Deposits (Rs. Crore) 35673.506920 (High incidence of

NRI deposits)

Net worth (Rs. Crore) 2676.79 1.5

Net profit/loss (Rs.Crore)

686 ( 272 )

Branches 689 104

ATMs 100 235

NPA (%) 0 19.77

CRAR (%) 14.74 -0.7

Employees 13,500 1,050



Technically, GTB will be the third bank to be merged with OBC (earlier two cooperative

banks were merged)

The Bank Employees Federation of India welcomed the Union Government’s decision of

merger and the Joint Secretary said that the salaries of GTB staff should be protected.

IMPACT OF THE MERGER ON OBC

Positive

1. There will be a clear synergy between the two banks in terms of geographical network

(as OBC is basically a North-based bank with 689 branches while the GTB is a South-

based bank with 104 branches). The OBC chief said the nationalized bank would gain interms of market penetration as it would get about 100 branches and one million

customers on a platter.

2. OBC will also benefit in terms of technology, as it would adopt the forward technologyof GTB and not go backward.

3. The merger will also benefit OBC in terms of ATM network as their present ATM’s

numbering 100 will go up by 235, taking OBC to the third position among public sector

banks in terms of ATM network.

Negative

1. The merger of GTB will not be all roses for OBC, as it will be saddled with Rs. 915crores Gross NPAs in addition to impaired assets of Rs. 300 crores from GTB.

2. The Capital Adequacy Ratio of OBC, which stood at 14.47% at the time of the merger is expected to come down to 13.1%.

3. OBC’s asset quality, which is one of the best in the banking industry, is likely to beimpaired with the merger.

4. Merging the operations of a new age private sector bank with that of an old public

sector undertaking is similar to retrofitting an ambassador taxi with spares retrieved fromMichael Schumacher’s Ferrari.

If we analyze the sequence of events in the working of the 10-year old GTB from 2000onwards the following lapses/shortcomings can be observed:

• Failure of RBI to heed to the warning bell in 2001 when it scuttled the merger of

GTB with UTI bank due to manipulation of GTB shares by Ketan Parekh and

Gelli, CMD of the Bank

• Failure of the RBI to observe complete erosion of Bank’s net worth in March

2002 and March 2003



• Failure of RBI to take action against GTB when the CRAR was negative (0.07%)

as against the stipulated 8% in March 2003.

• Failure of auditors of GTB to project the correct health of the GTB advances portfolio.

CONCLUSIONGlobal Trust Bank lost its TRUST by reckless lending, an unholy tie-up with scamster

Ketan Parekh and not being able to infuse fresh capital to keep in line with the conditionsset by RBI. The word ‘trust’ ought to conjure up a picture of soundness, safety and

confidence. However, in the recent past this word has been the most abused word.

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Banks Merger GTB

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