Global Trust Bank: Rise and Fall Global Trust Bank (GTB) was the outcome of liberalization polices

initiated by the Government 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 three entrepreneurs with considerable experience in the banking sector. The establishment of GTB was considered a major breakthrough in the Indian banking sector. 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 Indias (RBI) probe revealed irregular financial disclosures. Some of the major factors the led to the 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, GTBs shareholders would not get OBC shares. OBC benefited hugely, as its network and customer base expanded. It also earned tax benefits due to GTBs 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 1993-94 October 1994 October 1994 Equity capital Deposits Advances Net loss Market capitalization Gross NPAs * Data as on March 31, 2003 GTBs 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 by the 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 SEBI investigation 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, GTBs 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 banks financial position, the RBI appointed an independent Chartered Accountant to reconcile the differences. The report of the auditor in February 2003 confirmed the RBIs 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 banks progress on a monthly basis. GTB was also advised to change its statutory auditors for the year 2002-03. In order to complete the statutory audit and assess Ramesh Gelli GTB gets private bank license, unveils IPO Manmohan Singh inaugurates operations Commencement of operations Rs. 121 crores Rs. 6920 crores Rs. 3276 crores Rs. 272 crores Rs. 319 crores Rs. 915 crores

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 banks operating profit was inadequate to meet the backlog of provisioning requirements for its NPAs. GTBs audited accounts for the year ended March 31 2003 reported a marginally positive net worth, but yet again the RBIs inspection showed that the banks net worth had been eroded still further. In November 2003, the RBI asked the GTB Board to infuse fresh capital to restore the Banks 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 loans would 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 health from 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 that GTB 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 as medical 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 Indias most hi-tech banks. Indiscriminate lending to stockbrokers, diamond traders and exporters in Mumbai and Hyderabad brought about the banks downfall. GTB shares, which were quoted at Rs.114 in 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 be kept on trading in the counter. The Stock Market regulator warned of severe regulatory action if there were any manipulative operations in the demat accounts. The National Securities Depositories Ltd. (NSDL) advised GTB to appoint a Concurrent Auditor to oversee its depository operations for a period of six months.

SEQUENCE OF THE FALL FROM GRACE 1999-2000 January 2001 April 2001 June-July 2001 June 2002 February 2003 2003-04 July 2004 July 24 2204 Links with Ketan Parekh GTB proposes merger with UTI Bank Deal called off after RBI steps in, Gelli ousted as CMD Gelli quits Board, JPC calls for probe. RBI gives clean chit on GTBs liquidity RBIs assessment - negative net worth of GTB Banks net worth eroded further RBI rejects Newbridge Capital Infusion Plan 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 the moratorium, announced the merger of GTB with Oriental Bank of Commerce (OBC). ORIGINS OF ORIENTAL BANK OF COMMERCE Oriental 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 Advances (Rs. Crore) Deposits (Rs. Crore) Net worth (Rs. Crore) Net profit/loss (Rs. Crore) Branches ATMs NPA (%) CRAR (%) Employees Oriental Bank of Commerce 19680.75 35673.50 2676.79 686 689 100 0 14.74 13,500 Global Trust Bank 3275 6920 (High incidence of NRI deposits) 1.5 ( 272 ) 104 235 19.77 -0.7 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 Governments 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 Southbased bank with 104 branches). The OBC chief said the nationalized bank would gain in terms 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 technology of GTB and not go backward. 3. The merger will also benefit OBC in terms of ATM network as their present ATMs 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. 915 crores 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. OBCs asset quality, which is one of the best in the banking industry, is likely to be impaired 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 from Michael Schumachers Ferrari. If we analyze the sequence of events in the working of the 10-year old GTB from 2000 onwards 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 Banks 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.

CONCLUSION Global 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 conditions set 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. SMS Otp xxxx 5676791