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Gtb -Obc Merger

Gtb -Obc Merger

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Published by: meetwithsanjay on Apr 03, 2010
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10/28/2012

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The GTB - OBC merger – who is the gainer??
 Amit Mishra & Vivek Varshney
Introduction
The Union government issued a three-month moratorium on Hyderabad-basedGlobal Trust Bank, effective close of business on Saturday July 24, 2004 inthe interest of public and depositors.The moratorium would be inclusive of October 23, 2004 or an earlier date, untilan alternate arrangement is made. Thedepositors would be permitted towithdraw up to Rs.10, 000 from theisaving banks or current account or anyother deposit account through any of thebranches of the bank. After keeping Global Trust Bank's (GTB)depositors on the tenterhooks for threedays, the Government on Monday, July26 2004, came out with a final solutionfor the moribund Hyderabad-basedbank. It was to be merged with theDelhi-based Oriental Bank of Commerce(OBC), continuing the tradition oamalgamating a troubled financialinstitution with a public sectocounterpart.The GTB merger has come one year after the merger of Nedungadi Bank withPunjab National Bank. Nedungadi wasalso mismanaged by directors and topofficials and accumulated huge NPAs.This experiment has never been verysuccessful. But OBC insists this will bean exception to the rule.The merged entity, which would have atotal business of around Rs.66,000Crore, would have a spread in theSouth, thanks to GTB's strong retailnetwork. GTB has around 1,300employees and 103 branches.
Banking Industry in India
The Indian Banking sector hasundergone a sea change in the pastdecade with the implementation of theongoing banking sector reforms. Thesector over the years has become moreefficient with the implementation of prudential norms for asset classificationand improved thrust on technologyadvancement. The Public Sector Banks(PSB) still dominate the sector with 75%of the market share of business andprofits. The new private sector bankswith their technology driven businessmodel are fast catching up with thePSBs. The last two years has seenbanks book windfall gains in treasuryprofits. With the interest rates hardeningup, banks need to focus on core profitgrowth. The retailization of the banksbalance sheet has seen banks improvetheir asset mix with home loans, autoloans and personal loans.The Reserve Bank of India (RBI) isIndia's central bank. Though the bankingindustry is currently dominated by publicsector banks, numerous private andforeign banks exist. India's government-owned banks dominate the market.Their performance has been mixed, witha few being consistently profitable.Several public sector banks are beingrestructured, and in some thegovernment either already has or willreduce its ownership.Today the commercial banking systemin India may be distinguished into:
ü
Public Sector Bank
ü
Private Bank
ü
Cooperative Bank
ü
Development BanksNew private sector banks are those thatwere set up after the industry wasopened up in the early 1990s. In all, 10new banks have been set up since then,of which one, Times Bank, was mergedwith HDFC Bank in late Novembe1999. And despite a fall in treasury
 
income this year, most of these bankshave managed to do pretty well.
Global Trust Bank
GTB made a flying start in 1993,clocking Rs.100Crore (Rs.1 billion) of deposits on Day One of its existence. Itlater ran into bad loan problems of Rs.1,500Crore (Rs.15 billion). It had postedRs.272.7Crore (Rs.2.727 billion) netloss in the year ended March 31, 2003.
Global Trust Bank results for 2003-04
Deposits Rs.6, 920Crore Advances Rs.3, 276CroreExposure Rs.1, 560CroreCapital-adequacyratio-0.7%Net NPAs / Net Advances20%Return on assets -3.5 %Gross NPA Rs.1, 100Crore90-day provisioningnorm NPARs.1, 200CroreSource:(www.rbi.org.in,www.capitaline.c om,www.moneycontrol.com) There are investments worthRs.200Crore (Rs.2, 000 million) whichcan go bad. One would need to makeabout Rs.400Crore (Rs.4, 000 million)provisioning as all assets are not lossassets and there are securities to backthe loans.Ramesh Gelli, one of the promoter andthe ex-chairman, refuses to take theblame for Global Trust Bank's failure butholds his management style of totaldelegation of power to senior mangersand his hands-off approach responsiblefor the bank's collapse.
The Cause of the Crisis
Every crisis generates an exhaustivediscussion on the causes leading up toit. Enthusiasts of private banking havetheir pet theory — blame it on prioritysector lending. Unfortunately, data givea lie to this theory. Of GTB’s total NPAsof Rs.1, 500Crore, priority sectors suchas agriculture and small industriestogether account for 22.5 per cent(agriculture less than 1 per cent andsmall industries 21.5 per cent). The bulkof NPAs, viz. 77.5 per cent, isaccounted for by non-priority sector lending. GTB had an exposure of about52 per cent of its advances to the stockmarket, (a blatant flouting of RBIdirectives) so that a part of the problemmust have come about from erosion inthe value of investments.In the two years between 1999-2000and 2000-01, the bank's capital marketexposure went up to around 30 per centof its total assets. When the marketcollapsed in February-March 2001, thevalue of securities came downdrastically and the bank could notrecover from this even though itsexposure was reduced.Basically, any bank crisis (in theabsence of systemic adversemacroeconomic shocks) stems from twoallied sources —
1.
Flawed risk managementsystems
2.
Governance efficienciesThe risk management systems in mostprivate Indian banks leave much to bedesired. Lacking in-house specializedexpertise to develop value-at-riskmodels, banks resort to importing suchmodels from foreign consultants. Thefact that inadequate provisioning was akey feature in GTB’s turn of fortunesseems to reinforce this supposition. Butfaulty risk management is only half thestory. The other half relates to the issueof governance.Part of the reason for the stability andrespectability of the Indian bankingsystem has been the “arm’s lengthrelationship” traditionally characterizingbanks’ dealings with corporates.Industry representatives were inducted
 
in large numbers on the boards of publicand private sector banks, in the name of professionalism. In the absence of adequate accountability, safeguards anddeterrent provisions against misuse of authority, this has led to deterioration inloan quality as well as monitoring. Itwould be really instructive to investigateon a case-by-case basis each of the 20biggest NPAs in every bank.
Did RBI act too early or too late??
In just 36 tense hours, the ReserveBank of India, RBI, arranged a whiteknight for the eight lakh beleaguereddepositors of Global Trust Bank,GTB. The rescuer is Oriental Bank of Commerce, OBC, probably India'sstrongest PSU bank. That the RBI wasderelict in its handling of the GlobalTrust Bank case is something that mostpeople accept today, especially giventhat the RBI first detected GTB had anegative net worth as long back asMarch 2002, in stark contrast to themanagement's claim at the time that thenet worth was around Rs.400Crore(Rs.4 billion).Yet, instead of taking any serious action,RBI had the bank's auditors removed,complained about them to the Institutefor Chartered Accountants of India, andmore than two years later, the ICAIhadn't even moved on the matter!The larger issue however, and this iswhy GTBs continue to happen, is thateach player in the system is too busycompleting just formalities and no onefollows a case to its logical conclusion.In the GTB case, the RBI was content towrite to the ICAI, but never movedheaven and earth to ensure seriousaction got taken. Another case of aprivate bank offers the most eloquentexamples of this malaise.In the case of Gelli, the fact that he wasgetting investors to invest in his bank byassuring them the share prices wouldreach a certain level, one would havethought, should have been enough toget the RBI to cancel his bankinglicense.What makes the case even morecurious is that while the Oriental Bank of Commerce gave the RBI its letter of interest in the second week of July, thiswas not disclosed to investors till July26. Clearly there's a lot more than meetsthe eye in the GTB case and, since thefinance minister has gone on record tosay there were regulatory lapses, afuller public inquiry is called for.
Oriental Bank of Commerce
The most efficient and a zero NPA bank,Oriental Bank of Commerce (OBC) hasbeen one of the fastest growing banks inthe sector with one of the highestproductivity and lowest cost-to-incomeratio.
Some important facts
Priority sector lending - 40%
Computerization of 985 of its1,013 branches
Implementation of the corebanking solution on a pilot basis
200 ATM network.
As on March 31, 2004,
Deposits Rs.35,674 Crore Advances Rs.19,681 CroreTotal assets Rs.41,701 CroreGross non-performing assets(NPAs)Rs.1,211 CroreNet NPAs nilTotal income Rs.4, 022 CroreOperating profit Rs.1, 533 CroreNet profit Rs.686 Crore
Some important ratios
Investments todeposit ratio47.08 %Spread to assets 3.55 %Source:(www.rbi.org.in,www.capitaline.c om,www.moneycontrol.com)

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