the Rise and Fall of Global Trust Bank

ICMR Case CollectionICFAI Center for Management Research This case was written by K. Yamini Aparna, under the direction of Vivek Gupta, ICFAI Center for Management Research (ICMR). It was compiled from published sources, and is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. The Rise and Fall of Global Trust Bank FI NC 0 3 8 ! 2005, ICFAI Center for Management Research. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means- - electronic or mechanical, without permission. To order copies, call 0091-40-2343-0462/63 or write to ICFAI Center for Management Research, Plot # 49, Nagarjuna Hills, Hyderabad 500 082, India or email [email protected]. Website: www.icmrindia.org FINC/038 THE RISE AND FALL OF GLOBAL TRUST BANK “GTB had been sliding for several months now. Perhaps enough vigilance was not maintained in the past.” 1 - P Chidambaram, Union Finance Minister of India. “I would have loved to see Global Trust Bank remain as an independent entity, but in the best interests of depositors and employees this is the best decision.” 2 - Ramesh Gelli, Founder Promoter, Global Trust Bank (GTB). “It is a big relief that GTB is to be merged with Oriental Bank of Commerce. I have decided never to park any money with a private sector entity.” 3 - A Depositor of GTB. THE MORATORIUM On July 24, 2004, the Government of India imposed a moratorium on Global Trust Bank (GTB), a leading private sector bank, on the grounds of ‘wrong financial disclosures.’ The moratorium was for three months from close of business on July 24, 2004 till October 23, 2004. Earlier, the Reserve Bank of India (RBI) 4 had announced that GTB’s net worth 5 had turned negative as it had incurred huge losses and accumulated a significant number of non-performing assets (NPAs). 6 RBI stated that the numbers reported in GTB’s balance sheet did not match its audited figures. Moreover, GTB failed to provide satisfactory explanations to most of RBI’s queries regarding its capital market exposures and why prudent lending norms were not observed in disbursing huge amounts for investments in the stock market. 1 “GTB Forced to Merge,” www.news.bbc.co.uk, July 26, 2004. 2 Ray Marcelo, “Indian central bank tells Global Trust to merge,” www.news.ft.com, July 26, 2004. 3 “GTB Shareholders Could Be Left in a Lurch,” www.domain-b.com, July 17, 2004. 4 Established in 1935, RBI is the central bank that regulates and supervises the financial system in India. It is the banker to the government and all scheduled banks in the country. Its important functions are to prescribe broad parameters of banking operations within which India’s banking and financial system functions, to maintain public confidence in the system, protect depositors’ interest and provide cost- effective banking services to the public; formulate, implement and monitor the monetary policy, maintaining price stability and ensuring adequate flow of credit to productive sectors; and foreign exchange control. 5 Net worth is the difference between a company’s total assets less total liabilities. 6 NPA means advances that have turned bad because interest or principal is outstanding for more than 90 days. The Rise and Fall of Global Trust Bank 3 RBI said the moratorium was imposed in public interest and to protect the interests of depositors. All operations of GTB were frozen and it was ordered not to give loans without RBI permission. It was allowed only to make payments for day-to-day operations or for meeting obligations entered into before the order 7 . BACKGROUND NOTE The liberalization process initiated by the Government of India, during the early 1990’s witnessed the entry of several private players in the Indian banking sector. GTB was one of the earliest private sector banks to be incorporated on October 30, 1994, in Hyderabad 8 . GTB was promoted by Jayant Madhab (Madhab), Ramesh Gelli (Gelli) and Sridhar Subasri (Subasri). Madhab, a development banker, was employed with the Asian Development Bank, Manila. Gelli who was Chairman of Vysya Bank for10 years had played a major role in transforming that bank into one of India’s top private sector banks. Subasri was a former bank executive and a close friend of Gelli. Though the licence to GTB was given in the name of Jayant Madhab and Associates, Madhab’s involvement with GTB was affected by the loss of his only son. The bank’s operations were managed by Gelli. Apart from the three promoters, the International Finance Corporation (IFC) and the Asian Development Bank (ADB) were the bank’s major shareholders. GTB offered an array of products and services in retail, wholesale, corporate, treasury and investment banking and products for non-resident Indians, apart from depository and advisory services. The bank specialized in lending to the software, energy, telecom, textiles, pharmaceuticals and gems and jewellery sectors. Since its inception, GTB had been in the news several times. The three promoters raised Rs 400 mn, considered a substantial amount for individual promoters. With two international financial institutions – IFC 9 and ADB 10 – as shareholders, GTB became the first Indian private sector bank to attract equity participation from international investment banks. The initial public offer (IPO) in late 1994 was oversubscribed 60 times. Subscription worth Rs 62.40 bn from over one mn investors was received as against the original size of Rs.1.04bn. On opening day, the bank reportedly received deposits worth Rs one bn, which increased to Rs 10 bn by the end of the first year; and Rs 27.06 bn in three years. In three years of operations, the total business exceeded Rs 43.02 bn, making it one of the fastest growing banks in India. It was also the first among Indian banks to raise Tier II capital 11 from multilateral institutions. 7 GTB’s depositors could withdraw only Rs 10,000 during the moratorium period from savings accounts, current accounts or any other deposit account; and the withdrawals would be only through bank branches and not from any of the ATMs across the country as ATMs of the bank were disabled. In specific cases, including emergencies like medical expenses, higher education, obligatory expenses like marriage customers were allowed, by a general or specific order of RBI, to draw up to Rs 100,000. 8 Hyderabad is the capital city of Andhra Pradesh, a Southern state in India. 9 IFC is a member of the World Bank group and is headquartered in Washington DC in the US. It promotes sustainable private sector investments in developing countries. 10 Established in 1966, ADB is headquartered at Manila, Philippines. It is a multilateral finance institution working towards poverty alleviation in Asia and the Pacific regions. 11 Tier II capital is secondary capital of a bank that includes items such as undisclosed reserves, general loss reserves, subordinated term debt and more. The Rise and Fall of Global Trust Bank 4 In five years, GTB’s deposits were worth Rs 40 bn out of which 70 per cent were from retail investors. The bank had a network of 63 branches and 800 employees. Its presence in the States of Maharashtra, Andhra Pradesh, Karnataka and Tamil Nadu was significant with more than 70 per cent of branches in seven major cities and four metros. By July 2004, the bank had grown to 104 branches in 34 cities, 275 ATMs and 1400 employees. It had more than a million depositors with deposits worth Rs 65 bn. The loans disbursed were to the tune of Rs 35 bn. It maintained salary accounts of about 0.1 million private sector employees. THE FALL The collapse of GTB resulted from many mistakes committed by the bank’s management. GTB’s problems started in 2000 and the imposition of the moratorium finally ended its independent existence. RBI’s probe into GTB’s accounts revealed a significant erosion of the bank’s net worth and huge number of NPAs reflected its weak financials. Moreover, GTB’s attempts to strengthen its capital base through investments from overseas failed due to regulatory problems, resulting in the total collapse of the bank. The major factors that led to the fall of GTB included: NEXUS WITH KETAN PAREKH In mid-2000, GTB disbursed loans of Rs 1.4 bn to Ketan Parekh (KP) 12 , a leading stockbroker at the Bombay Stock Exchange (BSE). He used the money to purchase GTB shares from the BSE and the National Stock Exchange (NSE). GTB’s share trading volumes, usually in the thousands, shot up during June and July 2000 to millions. On June 7, 2000, nearly four million shares of GTB were traded. Massive trading was reported on July 06, 07 and 30 and October 31 and November 07, 2000. GTB’s share price shot up from Rs 65 to Rs 114 between October 2000 and January 2001. The Securities and Exchange Board of India (SEBI) 13 later confirmed that GTB’s stock price increased because of price manipulation. After the price increase, KP sold the shares and reaped huge profits. Later, in 2001, investigation reports on the latest securities scam 14 revealed that KP had received insider information relating to the proposed merger plans of GTB with UTI Bank 15 (Refer Exhibit I for GTB-UTI Bank Merger Issue). Gelli was accused of collusion with KP, though he denied the allegation. 12 Ketan Parekh and his group companies, Chitrakoot Computers Private Limited, Classic Private Limited, Goldfish and Nakshatra Software Private Limited, were alleged to have received more than Rs 2 bn from banking channels by way of loans and advances, intercorporate deposits, debentures, private placements and preference shares. 13 SEBI was established in 1992 with the primary objective of protecting the interests of small investors in capital market securities and promoting the development of and regulating the securities market in India. It also regulates the functioning of stock exchanges, stock brokers, depositories and various other intermediaries in the Indian capital market. 14 The securities scam involved stock brokers, Ketan Parekh being the most important and powerful of them, buying stocks at rock-bottom prices and then pushing it up. This was done along with the promoters and certain close cronies. Next, they would indulge in selling them at high profits. The method he used to acquire such huge chunks of shares was to borrow from banks and corporates against shares as collateral. 15 UTI Bank was the one of the first private sector banks that started operations in 1994. The bank was promoted jointly by the Unit Trust of India, Life Insurance Corporation of India and General Insurance Corporation and its associates. UTI Bank has a strong presence in both retail and corporate sectors. For the financial year ending March 31, 2003, the bank earned a net profit of Rs 1.92 bn. The Rise and Fall of Global Trust Bank 5 After the interim investigation report was received, SEBI imposed a ban in December 2002 on the promoters of GTB, KP and his associates from dealing in GTB shares until completion of investigation into the bank’s capital market activities. SEBI’s interim report on allegations of price rigging hindered the talks for the proposed GTB-UTI Bank merger and tarnished the image of GTB. FINANCIAL IRREGULARITIES RBI charged GTB with several financial irregularities and lack of transparency in its banking operations. It had not followed SEBI guidelines, which capped a bank’s direct exposure to capital markets at five per cent of total advances of the bank 16 . Since 1999, GTB had given loans worth Rs 17 bn to many stockbrokers against shares as security. When the stock market witnessed a major fall in the aftermath of the securities scam in 2001, loans given by GTB against the security of shares turned into bad debts, taking a toll on the bank’s financial position. (Refer Exhibit II for the BSE Sensex Chart). GTB’s weak financials were revealed in early 2002. It happened when the GTB’s accountability committee, headed by one of its directors and former Madras High Court Chief Justice KA Swami, examined the bank’s accounts and reported serious deviations and financial irregularities and recommended action against top officials of the bank. GTB announced on March 30, 2002 that seven of its top officials, including the executive director and promoter of the bank Sridhar Subasri had been sacked for being responsible for the irregularities. On April 01, 2002, a high-level team of RBI officials went through GTB’s books. The bank’s audited balance sheet for the financial year 2001-02 showed a net worth of Rs 4.004 bn and a profit of Rs 400 mn, whereas RBI’s inspection revealed that the net worth of GTB had turned negative. In view of this substantial variance, an independent chartered accountant was appointed by RBI to study the position. This exercise found that RBI’s assessment was correct and that there was gross under-provisioning for non-performing loans. In the wake of these financial irregularities, RBI placed GTB under monthly monitoring and its operations relating to advances, premature withdrawal of deposits, declaration of dividend and capital market exposure were restricted. RBI advised GTB to change its auditors for the next financial year. Lovelock & Lewes was replaced by PricewaterhouseCoopers (PwC) for the financial year 2002-03. The financial year ending March 31, 2003 of GTB was extended to September 30, 2003, to complete the statutory audit by the new auditors. Due to strict monitoring by RBI, GTB’s day-to-day operations returned to normalcy but the operating profit was still inadequate to cover bad debts. The bank’s accounts in March 2003 reported a marginally positive net worth. However, RBI inspections showed that the net worth had been further eroded and capital adequacy ratio (CAR) 17 had also turned negative. For the financial 16 According to RBI and SEBI rules, a bank’s total exposure to capital market by way of investments in equity shares, convertible debentures, units of equity linked mutual funds as also by the way of advances against shares and debentures, including issue of bank guarantees on behalf of stock brokers, should not exceed 5 per cent of the bank's total advances as on March 31 of the previous fiscal year. 17 Capital Adequacy Ratio (CAR) measures the amount of capital to be maintained by a bank against its lending. Minimum capital adequacy ratios are used to protect depositors and promote the stability and efficiency of a financial system. Two types of capital are measured – tier one capital which can absorb losses without a bank being required to cease trading, e.g. ordinary share capital, and tier two capital which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors. In India, the Tier one capital to total risk weighted credit exposures should not be less than 4 percent; total capital (tier one plus tier two less certain deductions) to total risk weighted credit exposures should not be less than 8 percent. The Rise and Fall of Global Trust Bank 6 year 2002-03, GTB recorded a loss of Rs 2.720 bn; gross NPAs stood at Rs 9.17 bn, accounting for 28 per cent of the bank’s total advances. Moreover, after filing the results for the Oct.-Dec. 2002 quarter with the stock exchanges, GTB did not file any financial information with the stock exchanges, violating SEBI guidelines and stock exchange listing agreements. In the audit report for 2002-03, PwC expressed worries on GTB’s ability to remain as a ‘going concern.’ 18 Though the audited financial results had not yet been declared by the time the moratorium was imposed, the financial reports submitted by GTB for previous years revealed several discrepancies. RBI lodged a complaint against the 2001-02 auditors with the Institute of Chartered Accountants of India (ICAI) relating to financial irregularities and similar action was contemplated against the 2002-03 auditors too (Refer Exhibit III for GTB’s Financial Results). HIGH NPAs High NPAs was a primary reason for GTB’s poor financial performance. According to experts, the problem of NPAs did not start with the securities scam in 2001 but much before. GTB had lent indiscriminately without following RBI norms, to stockbrokers, diamond traders and exporters. In late 2000 and early 2001, GTB gave loans of over Rs eight bn to corporates and stock market- related entities. For the fiscal 2000-01, GTB had a total of 55 major corporate NPA accounts; highest NPA accounts in trading (15); broking accounts (11); followed by accounts in food processing, textiles and petrochemicals. Other NPA accounts were from distillery, agriculture, gems and jewellery and media companies. In the last quarter of fiscal 2000-01, GTB reported a fall of 164 per cent in profit after tax (PAT) because of Rs 900 mn provisioning for NPAs. GTB’s exposure to the capital market in the fiscal ending 2000-01 was around 24 per cent of total advances; which came down to 14 per cent by March 2002 and around five per cent for the fiscal ending March 2003. Though the exposure to capital markets had been brought down gradually by GTB, the damage had already been done as most advances turned into NPAs due to the down trend of the stock market after the Securities Scam (Refer Exhibit IV for GTB’s Major NPA Accounts). GTB had to write off Rs 2.52 bn towards NPAs for the financial year 2001-02, after securing RBI approval to utilize reserves of Rs 2.0195 bn. Still, there was under-provisioning in the books. Much of GTB’s NPAs were due to the loans given to KP. KP and related entities were lent Rs 2.8 bn. A telecom company linked to KP was loaned Rs 2.5 bn and a media company was given Rs 2.5 bn. All these loans turned into NPAs. The RBI inspection report of March 31, 2002 stated that these companies had not fulfilled the criteria of end use of funds 19 . The bank recovered Rs 400 mn through the sale of securities and had to write off around Rs 1.5 bn of loans to KP. 18 The audit report stated that “attention is drawn regarding preparation of accounts on a going concern basis even through the net worth of the bank has substantially eroded after considering the loss for the year on account of substantial provision against NPAs, taking into account management’s assessment of growth of business, infusion of capital through strategic/financial/investment/issue of further capital. Accordingly, these accounts do not include adjustments aforesaid in case the management’s plans do not materialize. GTB’s making additional provisions towards NPAs by utilization of statutory reserves below the line after the net loss for the year was not in conformity with the accounting principles generally accepted in India.” (The Times of India, July 26, 2004). 19 The loan application of the company should state the reason for which the loan was sought and how the amounts, if granted, would be utilized by the applicant. This gives the justification for the grant of loan. The loan would be granted only if the bank is satisfied that the loan granted would be utilized by the applicant exclusively for the legitimate purpose for which it was granted. This is generally known in the banking parlance as “justification of end of funds.” The Rise and Fall of Global Trust Bank 7 As on March 31, 2003, GTB reported gross NPAs of Rs 9.158 bn while total provisioning for the period was at Rs 2.68 bn and the bank’s net NPAs for the period stood at 19.7 per cent of its advances. Between March and December 2003, GTB disclosed that it had made recoveries of about Rs 1.91 bn but again failed to disclose the level of net NPAs. RBI’S REFUSAL FOR NEW BRIDGE PROPOSAL RBI’s inspection of GTB’s fiscal ending 2003 accounts revealed that its net worth was eroded further and the CAR was negative. The central bank advised GTB to infuse fresh capital to prevent the net worth from remaining negative and restore its CAR to a minimum of nine per cent. The bank was advised to explore all possible options for infusion of capital through domestic sources or through merger with another bank. Since mid-2003, GTB had been searching for an investor to strengthen its capital base. However, GTB faced problems as investors, who were initially keen to pick up a stake in the bank, now shied away, expressing concerns over the bank’s weak financials. In early 2004, GTB’s efforts yielded positive results. The GTB board approved a proposal from NewBridge Capital (NewBridge), a San Francisco-based investment firm, which had a track record for turning around several banks. GTB expected to finalize the proposal relating to infusion of fresh capital by June 2004 and it hoped to make an announcement along with the declaration of annual financial results. The proposal was submitted to RBI in the first week of July 2004 for infusion of capital of over Rs 15 bn. RBI rejected permission because NewBridge sought regulatory concessions 20 . Two conditions the RBI found unacceptable were deferment of provisioning of Rs. 4 bn in bad debts over a three- year period and the venue of arbitration as Wales, UK. According to reports, RBI was reluctant to see GTB restructured by private investors and due to its strict guidelines for ownership of private banks and foreign investments in the banking sector, NewBridge walked out of the deal. This made the possibility of turning around GTB without RBI’s interference, remote. THE MERGER All these factors resulted in the imposition of moratorium by RBI on GTB. On July 26, 2004, RBI announced that GTB would be merged with the Oriental Bank of Commerce (OBC) 21 . As per the scheme, OBC took over all the assets and liabilities of GTB on its books. It acquired all 104 branches of GTB, 275 ATMs, a workforce of 1400 employees and one million customers at an estimated merger cost of Rs. 8 bn. OBC’s total business volume was expected to reach Rs 65 bn and the total branch network to cross 1,100. All corporate accounts including salary accounts were transferred to OBC. 20 NewBridge had asked for a concession on the 90-day provisioning norm on bad loans for the initial years after the capital infusion. Without this, the fresh capital would have to be deployed to take care of the existing sticky assets. Another favour sought related to rural branch network and priority sector lending requirements. As per the guidelines, for every three branches opened, the fourth needed to be in a rural area. GTB felt that NewBridge Capital may bring in other investors as well and a relaxation in such norms might help the new investors to turn around the bank much faster. NewBridge had proposed the restructuring of capital by reducing the face value of GTB shares from Rs 10 to Rs 1. The remaining Rs 9 was proposed to be used towards adjusting for losses. 21 OBC was a Delhi-based, north-centric public sector bank with over two-thirds of its deposits and almost half its advances and branches concentrated in the northern region. It was the fifth biggest public sector bank and was reputed to be one of the most efficient banks with zero per cent NPAs. OBC had the experience of taking over two small banks, Baridhoch Bank and Punjab Cooperative bank, and had been trying for some time to take over a south Indian bank to extend its network to the south. The Rise and Fall of Global Trust Bank 8 The entire amount of paid-up equity capital of GTB was adjusted towards its liabilities. There was no share swap between GTB and OBC, which meant that GTB shareholders were the ultimate losers, as they did not get any shares of OBC. Moreover, OBC enjoyed a huge tax break by acquiring GTB’s NPAs worth Rs 1.2 bn and impaired assets of Rs. 3 bn. OBC’s tax burden was reduced significantly by setting off the carried forward losses and unabsorbed depreciation of GTB against its own profits (Refer Exhibit V for the Financial Statements of OBC). The savings for OBC were estimated at nearly 40 per cent of GTB’s current liabilities. The merger process began on August 07, 2004 and the moratorium ended with the merger announcement. GTB lost its separate identity and became a part of OBC. Commenting on the synergy, BD Narang, Chairman and Managing Director of OBC, said, “There is a terrible amount of synergy between the two banks. We are a north-based bank and they are a south-based one. We should be able to clean up the books in a very short time.” 22 RBI claimed the merger was a win- win solution for both banks, allowing OBC to expand its operations in Southern India and protect the money of GTB’s depositors. THE AFTERMATH Though RBI’s decision to merge GTB with OBC came as a relief for the former’s depositors, analysts and industry experts raised concerns about the way RBI handled the entire issue. They said RBI had announced the merger of GTB and OBC, in less than 48 hours of the imposition of the moratorium. If the deal was already in process, they wondered why RBI took the extreme measure of imposing a moratorium instead of announcing the mandatory merger straight away. This step would have prevented panic and anxiety among GTB’s depositors. Analysts also wondered why RBI rejected the proposal of equity injection from NewBridge, which would have solved the re-capitalization problem of GTB easily and could have prevented the bank’s eventual collapse. They wondered why RBI favoured the merger with OBC and did not try for competitive bidding to acquire GTB. Moreover, though the interests of GTB’s depositors were protected, its shareholders lost their total investments in the bank overnight (Refer Exhibits VI for GTB’s Stock Performance). There were other questions raised on RBI’s role. For instance, if RBI was closely monitoring GTB’s financial situation since 2001 and as it knew the bank’s net worth had been wiped out, why did it wait three years to find a permanent solution? Analysts felt that RBI had been sending confusing signals regarding the GTB issue. For instance, in March 2002, RBI had declared that the bank’s net worth had turned negative; but in June 2002, it gave GTB a clean chit on liquidity, even though 9.23 per cent of its net advances had turned bad. Some banking experts held RBI responsible for GTB’s problems snowballing into a major banking crisis. GTB’s collapse raised doubts on the credibility of private sector banks in India. Before GTB, two other private sector banks, namely, Bank of Banaras and the Nedungadi Bank had collapsed in 2000 and 2002 respectively. However, compared to GTB they had a small presence. The depositors of those two banks were bailed out by two public sector banks, the Punjab National Bank and the Bank of Baroda, respectively. GTB was the biggest failure among private sector banks and it was an eye-opener to investors, who had considered such banks safe. Experts advised investors to be more prudent and vigilant about the credibility of these banks in future. (Refer Exhibit VII for Information on Private Sector Bank Failures). 22 “GTB to Be Merged with OBC,” www.tribuneindia.com, July 26, 2004. The Rise and Fall of Global Trust Bank 9 Analysts also said GTB’s customers should have been more aware about protecting their interests. GTB catered primarily to educated, city-based customers who were expected to be more knowledgeable and prudent. When GTB’s weak financial position was made public, they should have understood that their deposits in the bank were unsafe. However, they seemed to have been carried away by the bank’s higher rate of interest 23 . The entire issue served as a lesson for small investors to exercise more diligence while choosing a private sector bank. On the other hand, the GTB issue also meant that other private sector banks had to clean up their balance sheets and revamp their risk and credit management system to improve asset quality and maintain strict adherence to the principles of corporate governance and transparency. Analysts hoped that RBI would now be more cautious and determined to prevent the collapse of other private sector banks. QUESTIONS FOR DISCUSSION: 1. What factors according to you were responsible for the collapse of GTB? Do you think the bank was responsible for its own fate or some extraneous forces contributed to the bank’s problems? Also comment on the role played by Ramesh Gelli in the GTB crisis. 2. Examine the role of RBI in the GTB fiasco. Do you think RBI’s decision to impose moratorium and amalgamate GTB with OBC was justified? 3. The proposed scheme of amalgamation did not offer anything to the shareholders of GTB. Was it a fair decision on the part of RBI? What alternate solutions do you suggest to protect the interests of GTB’s shareholders? 4. In the light of GTB case, discuss the importance of transparency in dealings where public money is involved and the need for strict compliance with corporate governance policy. 23 GTB offered 6.25% interest for fixed deposits of three to ten years, as against 5.75% offered by other private sector banks in India. The Rise and Fall of Global Trust Bank 10 EXHIBIT I THE GTB-UTI BANK MERGER ISSUE Starting 2000, the banking sector witnessed a large number of mergers and amalgamations. Following the trend set by the two leading private sector banks – HDFC Bank and ICICI Bank -- which took over Times Bank and Bank of Madura respectively, GTB and UTI Bank declared their intention in January 2001 to merge and name the merged entity UTI Global Bank. The merged bank was to have UTI Bank as principal shareholder and P J Nayak, Chairman and Managing Director of UTI Bank, was to head the merged entity. Gelli was to continue on the Board of the merged entity, heading the new insurance venture to be promoted by UTI Global Bank. The proposed merger was expected to create the largest private sector bank in India in terms of deposits, advances and net profits during that time. The unearthing of the Securities Scam and GTB’s alleged association with KP raised doubts over the merger deal during April 2001. The negotiations took a dramatic turn as GTB asked for a higher swap ratio in its favour. The original swap ratio was arrived at based on the average values of the shares of the two banks; and did not adequately take into account the quality of GTB’s assets and, more particularly, its capital market exposure. Though it was not yet proved then, GTB shares were alleged to have been rigged, giving an undue advantage to it. GTB’s demand for a higher swap ratio made UTI demand a fresh valuation. The first valuation was done by SBI Capital Markets. Deloitte, Haskins & Sells was appointed to conduct the second valuation. The earlier swap ratio was 2.25:1 (nine shares of UTI for every four shares of GTB). Though it was favouring GTB, UTI made no issue about it and wanted the merger deal to go through smoothly as it considered the adverse ratio as the price it had to pay to obtain complete control over the merged entity. But, a demand for a still higher swap ratio favouring GTB made UTI demand a fresh valuation. The second valuation report also recommended the original swap ratio of 2.25:1. Meanwhile, pressure mounted on UTI Bank to pull out of the deal due to the questionable dealings of GTB with KP and the unfavourable swap ratio. Also, the UTI Group wanted to drop the name ‘Global’ from the proposed merged entity. UTI Bank wanted the entire deal to materialize only after the final report of SEBI on GTB’s suspected dealings came out, as it was not sure about GTB’s exposure to capital market funding. Ultimately, the merger deal was called off because UTI did not want to associate with a bank surrounded by controversies. After the proposed merger did not materialize, more troubles of GTB came to light. This was followed by the exit of Gelli from GTB’s board, being asked by RBI to step down. This raised questions about the credibility of GTB’s management. There were rumours of collapse of the bank in 2002 and the consequent mass withdrawals 24 from ATMs, especially in the twin cities of Hyderabad and Secunderabad, raised questions on the bank’s financial viability. Compiled from various sources. 24 A large portion of these withdrawals, amounting to over Rs 60 mn, were spread over three branches and 10 ATMs. GTB had around 15 major corporate clients in this region with over 10,000 individual salary accounts. Even though the situation was brought under control within two days, it affected the credibility of GTB and the management had to come out with an advertisement in the local dailies regarding the soundness of the financial position of the bank and the safety of deposits. The Rise and Fall of Global Trust Bank 11 EXHIBIT II BSE SENSEX CHART (1998-2004) Source: www.finance.yahoo.com. The Rise and Fall of Global Trust Bank 12 EXHIBIT III AUDITED FINANCIAL RESULTS OF GTB (2003-04) Year ending March 31 2004 2003 Interest Earned (a+b+c+d) 354.19 539.59 a) Interest/Discount on Advance/Bills 242.98 320.87 b) Income on Investments 93.67 206.78 c) Interest on balance with RBI & other interbank funds 11.47 10.99 d) Others 6.07 0.95 Other Income 161.06 191.36 (A) Total Income 1+2 515.25 730.95 Interest Expended 435.13 517.41 Operating Expenses(e+f) 158.91 177.1 e) staff costs 37.23 42.04 f) other operating expenses 121.68 135.06 (B) Total Expenditure (excluding provisions & contingencies) 594.04 694.51 (C) Operating profit/loss (A-B) before provisions & contingencies 178.79 36.44 (D) other provisions & contingencies 708.19 309.09 (E) provision for taxes 25.4 0.05 (F) Net profit/loss (C-D-E) -812.38 -272.7 Paid up equity share capital (Rs 10/- per share) 121.36 121.36 Reserves excluding revaluation reserves -931.54 -118.92 Analytical ratios i) capital adequacy ratio % 0 0 ii)earnings per share (Rs) -66.94 -22.47 Aggregate of non-promoter shareholding - number of shares 97433.80 96122906 -percentage of shareholding 80.29% 79.21% Source: www.globaltrustbank.com. The Rise and Fall of Global Trust Bank 13 EXHIBIT IV MAJOR NPA ACCOUNTS OF GTB GTB’s NPAs started to accumulate even before the Securities Scam. Indiscriminate lending to people close to the management without adequate security and without prudent lending norms prescribed by RBI respect caused an irreparable hole in the bank’s balance sheet. Some of the major NPA accounts which ate away the finances were as follows: " When the bank was placed under moratorium on 24 July 2004, Ketan Parekh’s outstanding dues to the bank were estimated at nearly Rs 2400 mn, without including bad loans to industrialists, who were known to be his close friends. " After Ketan Parekh, two other industry groups were favoured by the bank. One was the Balaji Group. The special relationship GTB's management shared with the Balaji Group in 2000 cost the bank Rs 1500 mn. The Balaji Group companies, which received generous helpings of GTB funds, included Balaji Distilleries, Balaji Hotels, Balaji Industrial Corporation, Jayaswal Neco. " The second was Pearl Distilleries, 60 per cent of whose capital was owned by the Balaji group. They received Rs 460 mn worth funds. " A single account called Petro Energy Products Company India (PEPCO) caused a big gap in the balance sheet of GTB during 1999-2000. In that year, GTB wrote off a hefty amount of Rs 82 mn as bad loans. Of this, exactly half was on account of PEPCO. The company was allowed to remit money abroad for a second-hand refinery, although land for the project was not acquired. In addition, the technology was obsolete and the project feasibility doubtful. " Another massive NPA account of the bank was the large term loan given to diamond merchant Bharat Shah’s company Rhiday Real Estate (Rs 430 mn) to finance a Rs 724.90 mn commercial complex in Mumbai. The loan turned bad by 2000. GTB had a huge exposure to Bharat Shah’s companies such as Beautiful Diamonds (Rs 460 mn default), B. Vijay Kumar & Co (Rs 1310 mn exposure in 2000) and Crystal Gems. The security cover on these loans was negligible. " All these huge loans and several others gradually eroded the bank’s capital to such an extent that, just before the imposition of moratorium, it had a negative net worth. A per the annual results declared by the GTB Board, provisioning had to be done for Rs 5.35 bn on account of NPAs for the year ending March 31, 2004. Source: Sucheta Dalal, “The accounts that brought down GTB,” www.indianexpress.com, August 08, 2004. The Rise and Fall of Global Trust Bank 14 EXHIBIT V AUDITED FINANCIAL STATEMENTS OF OBC (2002-04) (Rs in mns) Year ending March 31 2004 2003 2002 Interest Earned 33005.4 33042.7 30404.7 Other Income 7217.1 5313.9 4739.1 TOTAL INCOME (1+2) 40222.5 38356.6 35143.8 Interest Expended 18447.4 20899.4 20684.0 Operating Expenses 6444.8 5826.6 5288.9 TOTAL EXPENDITURE (3) +(4) (excluding Provisions and Contingencies) 24892.2 26726.0 25972.9 OPERATING PROFIT (A-B) (Profit before provisions and contingencies) 15330.3 11630.6 9170.9 Provisions and Contingencies -of which provisions for Non-performing assets 3874.3 3347.0 4275.5 4184.7 3476.6 Provision for Taxes 4595.3 2785.6 2488.8 NET PROFIT (C-D-E) 6860.7 4569.5 3205.5 Paid-up equity share capital 1925.4 1925.4 1925.4 Reserves excluding revaluation reserves (as per balance sheet of previous accounting year) 24842.6 19168.0 14271.9 Analytical Ratios Capital Adequacy Ratio 14.47 14.04 10.99 Earning per share (in Rs.) 35.63 23.73 16.65 a) Amount of gross non-performing assets (Advances) 12137.3 11462.5 NA (b) Amount of net non-performing assets 0.00 225.28 NA (c ) % of gross NPAs 5.9 7.0 NA (d) % of Net NPAs 0.0 1.4 NA Return on Assets (Annualized) (%) 1.7 1.3 NA Source: www.obcindia.com. The Rise and Fall of Global Trust Bank 15 EXHIBIT VI GTB’S STOCK PERFORMANCE (2000-04) The Rise and Fall of Global Trust Bank 16 EXHIBIT VII PRIVATE BANK FAILURES IN INDIA It must be noted that bank failures and imposition of moratorium is not new to the Indian banking industry. It did not start with GTB and may not stop there. Even before the nationalization of banks in 1969, Indo Commercial bank faced problems in 1960 and was amalgamated with Punjab National Bank (PNB). In the 1980s, Bank of Tanjore waded into troubled waters and was merged with Indian Bank. Other banks, which faced moratorium in the 1980s, were Bank of Kochin and Hindustan Commercial Bank. In the 1990s, United Commercial Bank, Karoor Central Bank of Kerala and Lakshmi Commercial Bank fell and were merged with United Bank of India, Bank of India and PNB respectively. As recently as 2000, Benares State Bank in Uttar Pradesh ran into trouble and RBI had to establish order by merging it with Bank of Baroda. In 2002, Nedungadi Bank fell and PNB had to come to its rescue. During the late 1990s, Times Bank faced problems as the Times Group faced a setback due to the down turn in the financial services industry. The bank was merged with HDFC, a thriving private sector bank. In 2002, Centurion Bank, another promising private bank, posted a loss of Rs 1620 mn for 2002. Huge provisions and write-offs messed up the balance sheet. The bank had to restructure by reducing paid up capital and strengthen the capital base through infusion of capital by merger with Bank of Muscat. This, in fact was the second chance given to Centurion. Before this, there was a merger between Centurion and one of the major promoter group companies, 20th Century Finance. Though the timely intervention of RBI protected the interests of depositors and established order in the banking system, the financial position of public sector banks took a beating after they took over private banks with adverse financial positions. For example, PNB had to write off Rs 373 mn in the fourth quarter of FY04 as an amortization of goodwill that arose from the amalgamation of the Nedungadi Bank three years back. A PNB official said that had it not been for the amortization charges, the net profit would have been higher by Rs 249 mn. The bank’s total net profit stood at Rs. 3 bn for the fourth quarter of FY04. When news of the collapse of GTB became public, the credibility of private sector banks came under the microscope again. The collapse of private banks is nothing new in Andhra Pradesh, where GTB had its headquarters. Between 2000 and 2004, almost a dozen cooperative banks closed down in the state, accounting for a loss of nearly Rs 14 bn of depositors' money. The repeated bank failures in the state made investors lose faith in the banking system as a whole. GTB, so far, was the biggest failure in the modern private banking sector. Unless the government takes serious confidence building measures, banks in the state may not see many depositors in the future. In fact, when GTB’s collapse became official, one depositor said he would never park his money again with a private bank. Source: www.eenadu.net, www.domain-b.com, economictimes.indaitimes.com. The Rise and Fall of Global Trust Bank 17 ADDITIONAL READINGS AND REFERENCES: 1. Rao, Pallavi, UTI Bank-GTB merger call-off was inevitable, www.rediff.com, April 05, 2001. 2. Katakam Anupama, After the horses bolted, Frontline, April 28 2001. 3. Menon, Balagopala, GTB, www.indiainfoline.com, May 03, 2001. 4. Ghosh, Sugata, GTB's partner hunt takes hit as RBI digs out bad loans, www.economictimes.indiatimes.com, February 24, 2004. 5. Mohandas, Poornima, Global Trust Bank awaits RBI nod for fresh capital infusion, www.thehindubusinessline.com, June 19, 2004. 6. Alexander, George Smith, GTB wants RBI to ease norms to facilitate takeover by NewBridge, www.economictimes.indiatimes.com, July 06, 2004. 7. Das Gupata, Samik, We asked RBI for it: Interview with Narang, www.economictimes.indaitimes.com, July 07, 2004. 8. Arun Kumar, Government issues three-month moratorium on GTB, www.hindustantimes.com, July 24, 2004. 9. Marcelo, Ray, Indian central bank tells Global Trust to merge, www.news.ft.com, July 26, 2004. 10. Annuncio, Charubala and Choudhury, Savitri, Global Trust Burst, Outlook, August 09, 2004. 11. Bhupta, Malini, No Trust Bank, India Today, August 09, 2004. 12. Sharma, E. Kumar, Trust Betrayed, Business Today, August 15, 2004. 13. www.hinduonnet.com. 14. www.tribuneindia.com. 15. www.telegraph.com. 16. www.sify.com. 17. in.biz.yahoo.com. 18. www.ndtv.com. 19. www.doman-b.com. 20. www.rediff.com. 21. www.flonnet.com. 22. www.business-standard.com. 23. www.eenadu.net. 24. in.news.yahoo.com. 25. finance.indiainfo.com. 26. www.samachar.com. 27. business-times.asai1.com. 28. www.banknetindia.com. 29. www.moneycontrol.com. 30. www.financialexpress.com.