ASSIGNMENT – 1

THE COLLAPSE OF GLOBAL TRUST BANK (GTB)

GLOBAL TRUST BURST

UNDER THE GUIDANCE
OF
PROFESSOR HARESH LALA
SEPTEMBER 2019

BY RAMSHA BATTERYWALA
 BANKING OF REFORMS OF 90

 In the early 1990s , the government embarked on a policy of liberalisation,

licensing a small number of Private Banks.
 These came to be known as New Generation tech-savy banks and included
GLOBAL TRUST BANK , UTI bank (sinced named as Axis Bank), ICICI
Bank and HDFC Bank
 This move, along with the rapid growth in thw Indian economy, revitalized
the banking sector in India, which has seen rapid growth in the with strong
contribution from all the three sectors of banks, namely government banks,
private banks and foreign banks.

 GTB opened its first branch in Secunderabad on October 30, 1994

 Received INR 1 Bn in depoits on day 1, INR 10 Bn by the end of first year
and INR 27 Bn at the end of 3 years
 They had a customer attractive business model such as high deposit rates, no
collateral requirements for loans, flexible timings.
 Promoters – Ramesh Gelli, Jayanta Madhab, Sridhar Subhasri
 August 14, 2004, GTB was amalgamated with ORIENTAL BANK OF
COMMERCE.
 New generation banks – GTB , ICICI, HDFC, UTI
To be a modern and model bank and to improve customer satisfaction and service
through reduction in cost of operation and intermediation and spur innovation of
specialised, customer friendly products.

 Build the business and the institution.

 Create shareholder value.
 Grow profitability.
 Develop a complete financial service organisation.
 Foster a caring and sensitive organisation.

 Ramesh Gelli – Chief Managing Director of Vysya Bank for 10 years

 Studied at Asian Institute of Management, London Business School and
Osmania University
 Member on AP State Planning Board, Board of Governors for Organisation
Development
 Trustee of Indian Board Equity Fund And Naandi, an NGO
 President of AIMA, Honorary secretary of Indian Bank Of Association
 First Indian Banker awarded Padmashri
 Positioned GTB as a regional bank
 Initial Public Issue of INR 1040mn received subscription of INR 62.40bn
from over 1 mn investors
 Received INR 1bn of Deposits on day 1, INR 10bn by the end of the first year
and INR 27bn at the end of 3 years
 GTB won Best Export Performance Award from the Gem and jewelry
industry
 Established more than 500,000 client relationships
 Presents in all major cities, systematically spreading coverage in smaller
cities
 Rated first amongst India Best Banks by Financial express.

 Adopted a simple expedient of offering high deposits rates to investors

 Loans given mainly on the basis of personal guarantee without any collateral
security
 GTB has spread its higher deposits rates over its lending rates
 GTB focused its lending to the small and medium companies, which could be
charged higher rate of interest
 Within SMEs, GTB focused on exporters of garment, diamonds, IT,
pharmaceuticals etc and give loans at higher interest rates

 Credit decision process

 In 2000, bank fell short of capital
 Lend to capital market (Ketan Parekh)
 Swap ratio of 9:4 (UTI:GTB)
 Share price – 2001/07 – 25.70
2004/08 – 3.60
 As of March 31, 2003
 Deposits: INR 6920.91 crores
 Advances: INR 3276 crores
 Gross NPA: INR 915.82 crores
 Capital market exposure: INR 156 crores
 Capital adequacy ratio: 0.7%
 GTB was involved in the stock market scam of 2001, that the stock broker
Ketan Parek ran
 It lent heavily to him and related parties which were speculating in the stock
market and tried manipulating their stock prices
 Misleading books of accounts
 Did this as they had plans for merger with UTI bank which would make them
very strong in the banking sector
 Increase in the stock prices would have helped them increase their valuations
 When the market crashed the bank suffered extensive losses.
  24 July 2004 – RBI 3 month moratorium on the operations of the GTB due to
negative net worth and mounting NPAs
 RBI said don’t panic, money is safe, its only a moratorium and not a closure
 26th July – 11.20 AM Government announced merging GTB with Oriental
Bank of Commerce (OBC), ensuring its survival
 India has been creating the history of merging failed banks with bigger
(government) ones
 B.D Narang, OBC’s, CMD, said merger allows his bank to expand its
operations in the south
 GTBs White Knight , New Bridge Capital gave offers to acquire the bank as
it had experience in turning banks around but was denied.
 RBIs swift response to the crisis was appreciated, but sourcess said in
February 2000, an Investors’ Grievances Forum urged both the RBI and
SEBI to look into banl’s operations
 RBI even gathered substantial evidences of management in the bank
 Nothing happened until the Ketan Parekh scam broke out in early 2001 and
not suprisingly showed that GTB was involved in it
 Fitch gave lowest rating to bank in 2003, while other agencies claiming bank
to bounce back and also bank promised to infuse new capital
 Even when RBI and the Joint Parliamentar Committee was set up to probe the
Ketan Parekh scam somehow Ramesh Gelli was exonerated by them

Some actions/events which are the main reasons for collapse of the bank include
 Involvement of Ramesh Gelli in Ketan Parekh stock market scam
 RBI did find mismanagement of funds around 2001 only but nothing was
done
 Differences between balance sheet and audited nos.
 Breach of prudent lending norms, huge lending to stock market related
entities
 Talks by promoters to raise fresh capital
 Rising NPA levels of bank

 Auditors submitted report on Sept 30th, 2003

 Accounts prepared on going concern though net worth susbstantially eroded
 Loans not fully secured
 Accounting method consistent except statutory reserve permitted by RBI
 RBI monitored bank on monthly basis
 Capital adequacy ratio turned negative though net worth improved a bit (Nov
2003)
 RBI insisted for merger
 Non performing assests increased
 RBI wanted to avoid controversy by allowing a Cayman Islands – registered
to take large stake in GTB
 July 2004 moratorium for 3 months, july 26th GTB taken over by OBC a PSB
 RBI amalgamated Global Trust Bank with Oriental Bank of Commerce
leaving GTB shareholders empty handed
 Small investors could not settle even after the merger announcement
 People had doubt on deal as OBC was most efficient bank at the time
 OBC witnessed sharp volatility on the stock market
 OBC filed the corporate action form with the depositories and the shares of
erstwhile Global Trust Bank were extinguished.
 Public shareholders have been treated pretty shabbily
 FII’s had been selling shares of GTB before the any public announcement
making only retailers suffer
 OBC, CMD Narang commented that he has been talking to RBI of possible
merger for 3 months
 SEBI announcement of examining trade data wasn’t of use after Narang’s
comment
 It took a mere 48 hours for the RBI to order the merger
 RBI was keen to product stakeholders, but equity shareholders got nothing.
 Ramesh Gelli refused to take the blame f e failure of GTB
 Bulk of GTB’s total NPA of INR 15000 million, were from non priority
sector creating doubt on lending norms being followed
 In two years between 1999-2000 and 2000-01 the bank’s capitaal market
exposure went up to 30% of its total assets
 Market crash reduced the values of securities drastically and the bank could
not recover from this.

 The bank ran into the losses because of several players acting for own
convenience
 This led to the sufferings for small, unwary and gullible investors and had to
pay a heavy price
 Unethical practices of the promoters and dull attitude of regulators brought
down the bank and its investors.

 Publicizing the directions given to the banks by the regulator

 Measures like Prompt Corrective Actions are at high level today
 Banks should cover all the major incidences in annual reports compulsorily
 RBI owes it to depositors, borrowers and investors should take immediate
actions unlike this case.
THANK YOU