The GTB - OBC merger – who is the gainer??
Amit Mishra & Vivek Varshney
Introduction
The Union government issued a three-
month moratorium on Hyderabad-based
Global Trust Bank, effective close of
business on Saturday July 24, 2004 in
the interest of public and depositors.
The moratorium would be inclusive of
October 23, 2004 or an earlier date, until
an alternate arrangement is made. The
depositors would be permitted to
withdraw up to Rs.10, 000 from their
saving banks or current account or any
other deposit account through any of the
branches of the bank.
After keeping Global Trust Bank's (GTB)
depositors on the tenterhooks for three
days, the Government on Monday, July
26 2004, came out with a final solution
for the moribund Hyderabad-based
bank. It was to be merged with the
Delhi-based Oriental Bank of Commerce
(OBC), continuing the tradition of
amalgamating a troubled financial
institution with a public sector
counterpart.
The GTB merger has come one year
after the merger of Nedungadi Bank with
Punjab National Bank. Nedungadi was
also mismanaged by directors and top
officials and accumulated huge NPAs.
This experiment has never been very
successful. But OBC insists this will be
an exception to the rule.
The merged entity, which would have a
total business of around Rs.66,
000Crore, would have a spread in the
South, thanks to GTB's strong retail
network. GTB has around 1,300
employees and 103 branches.
Banking Industry in India
The Indian Banking sector has
undergone a sea change in the past
decade with the implementation of the
ongoing banking sector reforms. The
sector over the years has become more
efficient with the implementation of
prudential norms for asset classification
and improved thrust on technology
advancement. The Public Sector Banks
(PSB) still dominate the sector with 75%
of the market share of business and
profits. The new private sector banks
with their technology driven business
model are fast catching up with the
PSBs. The last two years has seen
banks book windfall gains in treasury
profits. With the interest rates hardening
up, banks need to focus on core profit
growth. The retailization of the banks
balance sheet has seen banks improve
their asset mix with home loans, auto
loans and personal loans.
The Reserve Bank of India (RBI) is
India's central bank. Though the banking
industry is currently dominated by public
sector banks, numerous private and
foreign banks exist. India's government-
owned banks dominate the market.
Their performance has been mixed, with
a few being consistently profitable.
Several public sector banks are being
restructured, and in some the
government either already has or will
reduce its ownership.
Today the commercial banking system
in India may be distinguished into:
ü Public Sector Bank
ü Private Bank
ü Cooperative Bank
ü Development Banks
New private sector banks are those that
were set up after the industry was
opened up in the early 1990s. In all, 10
new banks have been set up since then,
of which one, Times Bank, was merged
with HDFC Bank in late November
1999. And despite a fall in treasury
income this year, most of these banks
have 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. It
later ran into bad loan problems of Rs.1,
500Crore (Rs.15 billion). It had posted
Rs.272.7Crore (Rs.2.727 billion) net
loss in the year ended March 31, 2003.
Global Trust Bank results for 2003-04
Deposits Rs.6, 920Crore
Advances Rs.3, 276Crore
Exposure Rs.1, 560Crore
Capital-adequacy -0.7%
ratio
Net NPAs / Net 20%
Advances
Return on assets -3.5 %
Gross NPA Rs.1, 100Crore
90-day provisioning Rs.1, 200Crore
norm NPA
Source:(www.rbi.org.in,www.capitaline.c
om, www.moneycontrol.com)
There are investments worth
Rs.200Crore (Rs.2, 000 million) which
can go bad. One would need to make
about Rs.400Crore (Rs.4, 000 million)
provisioning as all assets are not loss
assets and there are securities to back
the loans.
Ramesh Gelli, one of the promoter and
the ex-chairman, refuses to take the
blame for Global Trust Bank's failure but
holds his management style of total
delegation of power to senior mangers
and his hands-off approach responsible
for the bank's collapse.
The Cause of the Crisis
Every crisis generates an exhaustive
discussion on the causes leading up to
it. Enthusiasts of private banking have
their pet theory — blame it on priority
sector lending. Unfortunately, data give
a lie to this theory. Of GTB’s total NPAs
of Rs.1, 500Crore, priority sectors such
as agriculture and small industries
together account for 22.5 per cent
(agriculture less than 1 per cent and
small industries 21.5 per cent). The bulk
of NPAs, viz. 77.5 per cent, is
accounted for by non-priority sector
lending. GTB had an exposure of about
52 per cent of its advances to the stock
market, (a blatant flouting of RBI
directives) so that a part of the problem
must have come about from erosion in
the value of investments.
In the two years between 1999-2000
and 2000-01, the bank's capital market
exposure went up to around 30 per cent
of its total assets. When the market
collapsed in February-March 2001, the
value of securities came down
drastically and the bank could not
recover from this even though its
exposure was reduced.
Basically, any bank crisis (in the
absence of systemic adverse
macroeconomic shocks) stems from two
allied sources —
1. Flawed risk management
systems
2. Governance efficiencies
The risk management systems in most
private Indian banks leave much to be
desired. Lacking in-house specialized
expertise to develop value-at-risk
models, banks resort to importing such
models from foreign consultants. The
fact that inadequate provisioning was a
key feature in GTB’s turn of fortunes
seems to reinforce this supposition. But
faulty risk management is only half the
story. The other half relates to the issue
of governance.
Part of the reason for the stability and
respectability of the Indian banking
system has been the “arm’s length
relationship” traditionally characterizing
banks’ dealings with corporates.
Industry representatives were inducted
in large numbers on the boards of public reach a certain level, one would have
and private sector banks, in the name of thought, should have been enough to
professionalism. In the absence of get the RBI to cancel his banking
adequate accountability, safeguards and license.
deterrent provisions against misuse of
authority, this has led to deterioration in What makes the case even more
loan quality as well as monitoring. It curious is that while the Oriental Bank of
would be really instructive to investigate Commerce gave the RBI its letter of
on a case-by-case basis each of the 20 interest in the second week of July, this
biggest NPAs in every bank. was not disclosed to investors till July
26. Clearly there's a lot more than meets
Did RBI act too early or too late?? the eye in the GTB case and, since the
finance minister has gone on record to
In just 36 tense hours, the Reserve say there were regulatory lapses, a
Bank of India, RBI, arranged a white fuller public inquiry is called for.
knight for the eight lakh beleaguered
depositors of Global Trust Bank, Oriental Bank of Commerce
GTB. The rescuer is Oriental Bank of
Commerce, OBC, probably India's The most efficient and a zero NPA bank,
strongest PSU bank. That the RBI was Oriental Bank of Commerce (OBC) has
derelict in its handling of the Global been one of the fastest growing banks in
Trust Bank case is something that most the sector with one of the highest
people accept today, especially given productivity and lowest cost-to-income
that the RBI first detected GTB had a ratio.
negative net worth as long back as Some important facts
March 2002, in stark contrast to the • Priority sector lending - 40%
management's claim at the time that the • Computerization of 985 of its
net worth was around Rs.400Crore 1,013 branches
(Rs.4 billion). • Implementation of the core
banking solution on a pilot basis
Yet, instead of taking any serious action, • 200 ATM network.
RBI had the bank's auditors removed,
complained about them to the Institute As on March 31, 2004,
for Chartered Accountants of India, and Deposits Rs.35,674 Crore
more than two years later, the ICAI Advances Rs.19,681 Crore
hadn't even moved on the matter! Total assets Rs.41,701 Crore
Gross non- Rs.1,211 Crore
The larger issue however, and this is performing assets
why GTBs continue to happen, is that (NPAs)
each player in the system is too busy Net NPAs nil
completing just formalities and no one
Total income Rs.4, 022 Crore
follows a case to its logical conclusion.
Operating profit Rs.1, 533 Crore
In the GTB case, the RBI was content to
Net profit Rs.686 Crore
write to the ICAI, but never moved
Some important ratios
heaven and earth to ensure serious
action got taken. Another case of a Investments to 47.08 %
private bank offers the most eloquent deposit ratio
examples of this malaise. Spread to assets 3.55 %
Source:(www.rbi.org.in,www.capitaline.c
In the case of Gelli, the fact that he was om, www.moneycontrol.com)
getting investors to invest in his bank by
assuring them the share prices would
 These figures would show that the
amalgamation would not dent OBC’s
operational efficiency in the future. In
fact it can consolidate its presence in
the south and west by leveraging on the
GTB’s branch network and excellent
service synergies.
The OBC – GTB Merger
RBI did not have to wait for three
months to find a viable solution for
Global Trust Bank and announced the
takeover by Oriental Bank of Commerce
on Monday morning itself anticipating a
big problem from its 8-lakh strong
depositors.
The RBI had to rush through with the
merger proposal in the last one month.
Almost all nationalized banks including
Canara Bank, Andhra Bank, J&K Bank
were approached. Even Corporation
Bank was also sounded out. The RBI
zeroed in on OBC as the bank's NPA
level had come down recently. Once the
regulator selected the bank, it thrashed
out all the merger modalities like
safeguarding the depositor’s money and
retention of employees. The RBI sop of
`no swap ratio' is the icing in the cake
for OBC.
The RBI scheme makes it clear that the
merger will not be through a share swap
deal. The entire amount of the paid-up
capital and reserves of GTB will be
treated as provision for bad and doubtful
debts and depreciation in other assets.
If any surplus remains after
accommodating all appropriations, only
then will shareholders get the amount
on a pro-rata basis.
OBC will take over GTB, lock stock and
barrel, or rather loans, assets
and NPAs. The bank will take over
GTB's Rs.1,500 Crore bad loans in
exchange for which it gets 104 branches
of GTB and a million customers.
There couldn't have been a better
fit. North-based OBC now gets a
million customers and over 100
branches mostly in the southern states
of AP and Maharashtra. With GTB's net
worth being negative there will be no
share swap.
But OBC could well be paying a big
price. It is adding Rs.1,500 Crore of
GTB's bad debts to its clean balance
sheet. OBC's CMD B D Narang
is confident of recovering 40% of GTB's
debts.
Merger & the People Problem
While sewing up the legal, financial and
operational elements of the merger,
OBC Chairman B D Narang would,
however, do well to also give priority to
something mostly ignored during
mergers and acquisitions -- human
resources. McKinsey has dubbed it "the
people problem in mergers."
OBC is, of course, not new to mergers.
Nationalized in 1980, the bank grew in
size after Punjab Cooperative Bank and
Bari Doab Bank were merged into it in
1996. But these mergers are small
change compared to the GTB deal.
GTB would be vastly different. Despite
its recent troubles, a significant
percentage of the 1,200 GTB
employees enjoy much better salaries
and privileges than what a public sector
bank like OBC is constrained to pay its
own employees.
The scheme of amalgamation drafted by
the Reserve Bank of India has clearly
said that all GTB employees will
continue to retain their jobs and get the
same salary package and work on the
same terms and conditions as
applicable prior to the closure of
business hours on July 24. But "salary
fitment problems" could only be a part of
the "people problems" to be faced by
OBC.
People in charge of acquiring another
company often forget that mergers are
not just about balance sheets, cash
flows or marketing synergies; they are
about people making the synergies real.
The role of HR in an M&A deal is mainly
restricted to straightforward data --
headcount, pay, outstanding legal cases
and so on. No effort is made to
understand the skills and effectiveness
of the people of the acquired company,
how they work and relate to each other
and how to deal with the problems of
cultural integration. The Result is that
the post-merger, the management is
perpetually in a fire-fighting mode
having to deal with HR issues instead of
devoting time to business operations.
The major fallout of this is flight of top
quality people. According to The
McKinsey Quarterly, if key employees
don't feel that they have been kept in the
loop after a merger, they will probably
start honing their resumes.
For OBC, the biggest challenge would
be how to treat the brighter of the GTB
employees, who would be the most
vulnerable at this point. According to
some estimates, around 250 GTB
employees have already left the bank
from the time trouble started brewing in
the organization. As per the The
McKinsey Quarterly, the takeover
approach usually proceeds on the
assumption that the acquirer's
management will remain, but exceptions
must be made when the acquired
company's employees -- some of them,
at least -- are clearly superior. This
means OBC should quickly identify
Reference:
1. Draft scheme of the merger, www.rbi.org.in
2. Moratorium details, www.rbi.org.in
3. Financials of the companies, www.capitalline.com
4. News Analysis, www.moneycontrol.com, www.economictimes.com,
www.rediff.com
GTB's key people, tell them that they
are well regarded, and offer incentives
sufficiently generous to keep them.
Can OBC bring back the trust?
The fiasco does throw up several
uncomfortable questions pertaining to
the regulatory policies with regard to the
banking industry. One of the questions,
uppermost on the minds of the gullible
GTB depositors, is why did the RBI wait
so long despite being aware of the
shenanigans of GTB?
The RBI could have taken action against
GTB two years back when it stumbled
upon the bank's crooked ways. It could
have superceded the GTB Board under
the Banking Regulation and RBI Act,
and appointed its own people to clear up
the mess before putting it up on the
block or inducting a new management,
like it did in case of the Centurion Bank.
Another school of thought is of the view
that the implosion of GTB is its own
making and that the RBI should leave
the bank to do the cleaning up job
instead of merging it with OBC. But, now
that the RBI has decided to merge GTB
with OBC, it remains to be seen if the
marriage of a troubled bank with a lean
and mean one is the right move or not?
As for GTB investors, they had enough
warnings coming their way.
Despite OBC’s insistence that this
merger will be different from the other
mergers of recent times like Nedungadi
Bank with PNB, this experiment has
never been very successful.