GLOBAL TRUST BANK :

THE BANK THAT WENT

BURST

Vivek Sharma (42)

Mark Gulati (39)

Harshit Mishra (52)

Tushar Roy Monga(49)

Suraj Kashyap(40)

TEAM 10

Flow Of Presentation

• Brief History of Indian banking Scenario.

• Banking reforms in 1990’s.

• Introduction to global trust bank.

• Financials of global trust bank.

• The Problems.

• Moratorium By RBI.

• SEBI intervention.

• Countdown to collapse.

• Causes of crisis.

• GTB- OBC merger.

• Post merger scenario.

• Questions.

• Conclusions & Learnings.

• References

Brief history of Indian Banking Sector

• 1949: Enactment of Banking Regulation Act.

• 1955: Nationalization of State Bank of India.

• 1959: Nationalization of SBI subsidiaries.

• 1961: Insurance cover extended to deposits.

• 1969: Nationalization of 14 major banks.

• 1971: Creation of credit guarantee corporation.

• 1975: Creation of regional rural banks.

• 1980: Nationalization of seven banks with deposits over 200 crore.

Note :After the nationalization of banks, the branches of the public

sector bank India rose to approximately 800% in deposits and

advances took a huge jump by 11,000%.

Source : www.capitaline.com

Accessed on : 09/02/2015 1:30 pm.

Banking Sector Reforms in 1990’s

• Competition Enhancing Measures.

• Measures Enhancing the role of Market Force.

• Prudent Measures.

• Institutional and Legal Measures.

• Supervisory Measures.

• Technology related measures.

Source: http://www.people.hbs.edu/scole/webfiles/other/01-bankreform-2004.pdf

Accessed on 10/02/2015 5:30 pm

Global Trust Bank• One of the earliest private sector bank in India.

• Promoter : Mr. Ramesh Gelli, Sridhar Subasri, and Jayant Madhob.

• First Branch Secundrabad, Andra pradesh.

• Collected more than 1000 Mn. INR In deposit in the first day.

• Achieved a quick, Powerful and foolproof system.

• Initial Public Issue of RS 1040mn received subscriptions of Rs 62.40bn from over 1 mn investors.

• Received Rs 1bn of deposits on day 1, Rs 10bn by the end of first year and Rs 27bn at the end of 3 years .

• GTB won Best Export Performance Award from the Gem and Jewelry industry

• Rated first amongst India Best Banks by Financial Express

Source : http://ramkey.expertscolumn.com/article/yet-another-bank-collapses-india

Accessed on : 09/02/2015 4:15 pm

The fast Ultra Modern and Cost effective

banking services“We have aimed to provide a world class products and best service

level to our customers “

Mr. Ramesh Gelli

• 275 ATMs which allowed clients to deposit and withdraw cash, know

the account balance, get mini statement and other basic features,

which nationalized banks lacked.

• Introduced phone banking.

• Core Banking services.

• Announced the inception of online banking with its software

BankAway in 1999.

Global Trust Bank’s Financials

• After a flying start the bank ran into a loan problems of INR 15,000

Mn.

• Its results for the Financial year were as follow :

• Deposits INR 69,200 Mn

• Advances INR 32,760 Mn

• Exposure INR 15,600 Mn

• Capital Adequacy ratio 0.7 %

• Net NPA’s 20 %

• Return on assets 3.5 %

• Gross NPA INR 11,000 Mn

90 days provisioning

• Norm NPA INR 12,000 Mn

Source : www.rbi.org.in

Accessed on 10/02/2015 2 : 00 pm

Share Price of GTB

0

10

20

30

40

50

60

70

80

share price

1995 96 97 98 99 2000 01 02 03

Source : http://www.banknetindia.com/board/817.html

Accessed on 10/02/2015 2 : 00 pm

Moratorium By RBI

• On RBI application, order of moratorium issued in respect of

GTB on 24 July 2004

• Moratorium is permission granted by Govt. to delay meeting

their obligations for their period.

• During the period, the bank would be permitted to make only

those payments that were specified in the order.

• Withdrawals were not permitted from ATM’s .

• Various restrictions came as a hard blow to 800000

customers who faced the possibility of losing money.

Source : Fernando A.C. Accsessed on 10th Feb 2015

INVESTIGATION INTO SALE OF

SHARED BY PROMOTERS : SEBI

INTERVENTION

• The promoters had been selling shares after the order

• Girish Gelli, director and son of former chairman sold 849238 shares of the bank.

• In all 40 million shares were sold within 1 week.

• Foreign stake also decreased.

• Bank was probed by RBI,SEBI and joint commission on alleged stock scam

• Promoter Gelli was banned from SEBI for conducting any stock transaction

Source : Fernando A.C. Accsessed on 10th Feb 2015

COUNTDOWN TO COLLAPSE

• Ramesh Gelli’s involvement in Ketan Parekh Scam.

• GTB’s balance sheet shows a net worth of INR40.04 million and a

profit of INR 400million.However RBI’s own inspection revealed that

the net worth was negative.

• Large variance between inspected and auditor’s figures

• Statutory audit done

• Balance sheet showed loss whereas there had been an operating

profit.

• RBI found that the bank’s net worth had fallen and CAR turned

negative.

• The bank was advised to raise fresh capital.

Source : Fernando A.C. Accsessed on 10th Feb 2015

The cause of crises

• Ramesh Gelli refused to take the blame for the failure of

GTB.

• Of GTB’s total NPA if INR 15000 million, priority sectors

such as agriculture and small industries accounted for 22.5

percent, the bulk of GTB’s NPA of 77.5 percent was from

non priority sector.

• In two years between 1999-2000 and 2000-01 the banks

capital market exposure went up to 30 percent of its total

assets.

• When the market collapsed, the valus of securities came

down drastically and the bank could not recover from this.

Proposal to Merge GTB with OBC

• RBI has to Protect Customers

• After many approaches for mergers, RBI settled for OBC for merger

• OBC will take care of the 15,000 million of bad debts

• In return would get 104 branches & 8,00,000 customers

Source : Fernando A.C. Accsessed on 10th Feb 2015

Synergy Between GTB & OBC

• North based OBC got 104 branches in Southern part of the country

• OBC’s CMD Mr. B.D. Narang was confident in recovering the bad

debts of GTB

• All the processes at the GTB would remain same including the

structure and emplyoees

• Software and technologies used were same which was a hope of

harmony after the merger

Source : Fernando A.C. Accsessed on 10th Feb 2015

GTB & OBC results for 2003-04

Particulars GTB OBC Combined

Advances 32.76 156.77 189.53

Investments 26.5 147.8 174.3

Deposits 69.21 298.09 367.3

Net profit -2.73 4.57 ----

Gross NPA 9.16 11.46 20.62

Net NPA 6.48 2.25 8.73

Gross NPA

(per cent)

25.8 6.9 10.8

Net NPA (per

cent)

19.8 1.4 4.6

Branches

(nos)

87 989 1076

Staff (nos) 1,314 13,507 -----

Capital

adequacy

ratio

0.0 14.0 12.2

Who is to be Blamed for GTB fiasco

• Many lost their hard-earned money with GTB

• No reason to blame who invested with the bank

• RBI’s policies were questioned, why did RBI waited so long while it

knew about the murky on-goings

Source : Fernando A.C. Accsessed on 10th Feb 2015

GTB is now OBC

• Government of India approved the merger and it became effective

from 14th August 2004.

• Customers of GTB

– Old customers would now operate their account as account of OBC now

onwards.

– Several arrangements were made to ensure the same services being offered to

them.

• Shareholders of GTB

– Shareholders will receive payments on pro-rata basis after clearing the liabilities

of GTB

– B.D. Narang was confident in recovering the bad loans of GTB

– GTB was south based bank and thus will provide a extra cover in the south for

OBC

Source : Fernando A.C. Accsessed on 10th Feb 2015

Post Merger scenario

• According to OBC , internal investigation revealed that GTB had

taken high credit exposures in certain accounts. On the basis of

internal investigation OBC filed a complaints on the following grounds

:

• Against Unitel software for having caused the wrongful loss of INR 67.68

Mn.

• Against Ashok Advani erstwhile GTB for cheating the Bank to tune INR 150

Mn.

• Against Petro energy Products for tuning 784.1 Mn, against Shonk

Technologies for wrongful loss of 384.9 Mn and Against Pearl Distilleries

Ltd. wrongful loss of INR 102.8 Mn.

Source : Fernando A.C. Accsessed on 10th Feb 2015

Questions-1

• The collapse of GTB should be attributed not only to the lack of ethics and avariciousness of its promoters, but also to the lack of competence and alacrity of the regulators. Would you agree ? Explain your stand.

• The RBI didn't do much to remove Gelli's influence from the bank, or at least nothing that was visible to outsiders.

• The RBI was content to write to the ICAI.

• In December 2002, after it found prima facie evidence that the promoters of GTB were in cahoots with Ketan Parekh to jack up the prices of the bank's scrip -- this is why GTB's merger with UTI Bank was put off – SEBI decided to freeze the GTB shares held by these people/firms for a period of 18 months

• Clearly there's a lot more than meets the eye in the GTB case and, since the finance minister has gone on record to say there were regulatory lapses, a fuller public inquiry is called for.

Source : Fernando A.C. Accsessed on 10th Feb 2015

Questions-2

• From the hindsight of GTB’s ultimate failure, trace its emergence as

the most tech savvy brand among banks in India.

• Portraying as a symbol of technology-savvy banking wizard is not

going to work when your bases are build on un-ethical practices.

• Though GTB was a pioneer in bring new software technology,

opening a large no of ATM and branches, and good front office

customer service but it played with the trust of 8lacs customers.

• So the tech was of no use.

Questions-3

• Explain the causes that contributed to the ultimate

collapse of GTB

• Funded scamsters like Ketan Parekh

• Allegations of rigging of GTB prices

• Merger with UTI bank called off

• SEBI prohibited GTB from raising money

• GTB ultimately fell to its lowest level.

• In 2000, Bank fell short of Capital.

• 2001-02, it suffered a nearly 60 per cent fall in net profits.

• Share price- 2001- 25.70

2004 - 3.60

Source : Fernando A.C. Accsessed on 10th Feb 2015

Questions-4

• Comment : ‘ The failure of GTB is also the failure of the

banking regulatory system in the country

• Yes. Connection with Ketan Parekh was found in 2001 stock

scam, RBI did replaced Gelli but failed to address fundamental

problem.

• The RBI could have moved against GTB in 2002 when it found

the problem.

• Financial misleading was confirmed in Feb 2003, but RBI gave

time to GTB to publish it financial results for FY03 and then

welcomed its move to clean to clean but balance sheet.

• After that just in 10 months RBI changed its position and

placed GTB under moratorium of 3 months.

Conclusion

• The bank ran into the colossal losses because of several role players

enacted to suit their convenience, which ultimately led to the suffering

for small, unwary and gullible investors who had to pay a heavy price.

• The unethical practices of the promoters and the lethargic attitude of

the regulators by not reacting on time all seems to have together

brought down the bank and its investors

Learnings

• Acting in a way to suit their personal interest can result in

the collapse of an organization.

• Clumsy attitude of the regulator resulted in the downfall of

the banking sector of the country.

Refrences

• http://archives.digitaltoday.in/businesstoday/22031998/cf.html

• http://www.banknetindia.com/board/817.html

• http://wap.business-standard.com/article/specials/sebi-to-prosecute-

5-gtb-directors-for-insider-trading-198031201082_1.html

• http://expressindia.indianexpress.com/fe/daily/19980717/19855054.ht

ml

• http://www.frontline.in/static/html/fl2117/stories/20040827003502800.

htm

• http://www.clds.cn/english/news/show.aspx?newsID=3803

• http://ramkey.expertscolumn.com/article/yet-another-bank-collapses-

india

• www.sebi.gov.in/cms/sebi_data/attachdocs/1379572440984.pdf