Case Study

The Rise and Fall of Global Trust Bank

By:Dhiraj Agarwal (01)Rajat Agarwal (03)Hersh Inder Lulla (26)Mrigendra Singh Parihar

(32)

GTB’s Ramesh Gelli

GTB bank- A High Flying EntityPromoted by Jayant Madhab, Ramesh Gelli and

Sridhar Subasri who together raised Rs. 400 mnInternational Finance Corporation and Asian

Development Bank other major shareholdersFirst Indian private sector bank to attract equity

participation from international investment banks

GTB offered its clients an array of services like retail banking, investment banking, treasury management, NRI products etc.

Portrayed its image as extremely tech-savvy with delivery of world class services to its customers

Immediate LandmarksRs 1 bn worth of deposits on Day One of

operations and 10 bn by the end of first yearSubscription worth Rs 62.40 bn against original

size of Rs 1.04 bn .(oversubscribed 60 times)In three years of operation, business exceeded

Rs 43.02 bnBy July 2004, 104 branches in 34 cities, 275

ATMs and 1400 employeesFrom the very beginning GTB concentrated on

mid-market corporates involved in software, textiles, energy, gems and jewellery (known as Diamond Merchants Banker) and exports

GTB collapse reasonsHigh NPAs due to indiscriminate lending and gross

under-provisioning for NPAs

Bank’s direct exposure to capital markets was around 24% of advances in fiscal year 2000-01, whilst the cap is 5% according to SEBI guidelines

Loans against shares as security; turned into bad debts with the fall in the stock market

Not monitoring end use of lent funds, many found way to few specific companies

False auditing of Financial statements (Window Dressing)

Beginning of the FallMerger Issue with UTI

-Swap ratio of 2.25:1 -Disclosures of GTB involvement with securities scam

of 2001

Merger Issue with New Bridge capital-Deferment OF PROVISIONING OF Rs. 4 bn for a three

year period-Venue of Arbitration as wales, UK

Imposition of Moratorium on July 26, 2004

Merger of GTB with OBC, only 48 hours after imposition of moratorium

Relationship with Ketan Parekh and role in Stock Market Scam Either a high stakes reckless gamble by GTB

Or Fulcrum for Ketan Parekh’s transactions in market

Parekh’s corporate associates, investment companies, network of numerous investment firms had accounts with GTB

JPC(Joint Parliamentary Committee) revealed the tremendous velocity with which funds were transferred among these entities

GTB’s lending was dictated by the stock market, not by business potential

Merger with OBCOBC acquired all 104 branches, 275 ATMs and

1400 employees, one million customers at cost of Rs 8 bn.

OBC’s tax burden reduced by setting off carries forward losses and unabsorbed depreciation of GTB

Gave OBC business expansion into southern India

Gave relief to depositors and creditorsUltimate losers were GTB’s retail Investors as

there was no provisioning for a share swap between two entities. Was it justified?

Political connections?RBI in knowledge of problems in GTB for 2-3

years as shown in interim reportsNominees on board of GTB; no proactive

measures takenRamesh Gelli, very close to the then Chief

Minister of AP Mr. Naidu. TDP lost power in AP, easier for RBI to take

actionsGTB expected TDP to rule AP for few more

years, assumed it would buy more time to stabilize itself

RBI actions and reasonsGTB’s accountability committee examined the

bank’s accounts and reported serious deviations and irregularities.

Negative net worth shown as net worth of Rs 4 bn and profit of Rs 400 mn (found by RBI officials)

GTB placed under monthly monitoring, operations relating to advances, premature withdrawal of deposits, declaration of dividend and capital markets exposures were restricted

Auditors Lovelock & Lewes replaced by PwC

LearningsRBI should publicise the directions given to

the bankShould publicly announce the broad confines

of actions taken under Prompt Corrective Actions regime

RBI owes it to depositors, borrowers and investors

RBI should direct banks to publicise such incidents in their annual reports

Questions to PonderShould a bank’s operations be determined by the

sole objective of generating returns to its promoters?

Why was requisite vigilance not maintained in the past by RBI to ensure that the bank is following all the norms?

Why did RBI refuse the infusion of fresh capital through new Bridge Capital?

Who was a bigger defaulter - GTB or RBI?

Who should absorb risks in the future – Investors, Company or RBI?

What necessary changes should be made to prevent similar cases in the future?

Why did RBI and SEBI allow trading of shares when the bank was under critical inspection?