Page 16 - DCOM208_BANKING_THEORY_AND_PRACTICE

Unit 1: Introduction to Banks

The Initial Public Offer (IPO) in late 1994 was oversubscribed 60 times. Subscription worth Notes
` 62.40 bn from over one mn investors was received as against the original size of ` 1.04
bn. On opening day, the bank reportedly received deposits worth ` one bn, which increased
to ` 10 bn by the end of the first year; and ` 27.06 bn in three years.
In three years of operations, the total business exceeded ` 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 from multilateral institutions. In five years, GTB’s deposits were worth ` 40 bn out
of which 70 per cent were from retail investors.
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.
Nexus With Ketan Parekh

In mid-2000, GTB disbursed loans of ` 1.4 bn to Ketan Parekh (KP), 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).
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).
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 ` 8 bn. OBC’s total business volume was
expected to reach ` 65 bn and the total branch network to cross 1,100. All corporate accounts
including salary accounts were transferred to OBC. 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 ` 1.2 bn and impaired assets of ` 3 bn.
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 recapitalization 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

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