Page 15 - DCOM208_BANKING_THEORY_AND_PRACTICE

Banking Theory and Practice

Notes The case describes the growth and collapse of Global Trust Bank, a leading private sector
bank in India. Since 2001, GTB’s name was associated with scams and controversies, thereby
casting shadows over the credibility of the bank and its management.
Due to the overexposure to capital markets and huge NPAs, the bank was in a financial
mess.

When GTB tried to cover up its monumental NPAs through under provisioning, RBI - the
Central bank and the regulatory authority for banks in India, appointed an independent
team to review the finances of the bank. The review revealed various financial discrepancies
kept covered by the bank. RBI imposed a three month moratorium on GTB on the ground
of “wrong financial disclosures” and within two days the bank was merged with Oriental
Bank of Commerce (OBC), a public sector bank. With the merger becoming effective,
GTB’s identity came to an end and it became a part of OBC.
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) had announced that GTB’s net worth had
turned negative as it had incurred huge losses and accumulated a significant number of
Non-performing Assets (NPAs). 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. 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.
Background Note

The liberalization process initiated by the Government of India, during the early 1990s
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.
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 for 10 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 ` 400 mn, considered
a substantial amount for individual promoters. With two international financial
institutions – IFC and ADB - as shareholders, GTB became the first Indian private sector
bank to attract equity participation from international investment banks.
Contd...

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