From Business World of 28 July 2004.
The shadow of
lost trust
Despite 13 years
of reforms, Indian banking is still dominated by government-owned banks. A
handful of foreign banks such as Standard Chartered and Citibank have secured a
foothold; a few private banks such as ING Vysya Bank have prospered. But they
have thrown up few heroes. Ramesh Gelli was one of the few. He turned a staid
Vysya Bank into the raging favourite of the stock market; for his success he
got a Padma Shri in 1990. And when, in its early reformist enthusiasm, the
government threw the field open to new private banks, Gelli was one of the
first to throw in his hat.
The Global Trust
Bank was his creation. Its IPO was oversubscribed a hundred times. It
attrtacted investment from the International Finance Corporation, World Bank's
equity arm. Gelli modeled it on Vysya Bank, from
whence he drew quite a number of senior managers. He made Secunderabad the
base, and cast his net across Andhra Pradesh. It was a different model from
that of the other major newcomers, such as HDFC Bank, ICICI Bank and IndusInd,
which based themselves securely in Bombay, the financial capital, even while
they ventured out into the countryside. He shaped it as a regional bank,
catering to local industry and trade. The bank's board reflected this
convergence of interests. Chief
minister Chandrababu Naidu's determination to make Andhra the leading state
augured well for Gelli.
But while its
focus was regional, his outlook was global. Global Trust Bank was a pioneer in computerisation
and internet banking. It kept open two hours longer than the rest, it let a
customer do any business at any counter and at any branch, and it even
forwarded mails that customers sent through it. The bank's profits in the first
two-and-a-half years exceeded its equity capital.
However, the
regional focus ran aground; by the end of the millennium the bank was short of
capital, and Gelli was looking for growth through mergers. Negotiations were
begun with HDFC Bank, and then with IndusInd Bank, and came to nothing. Merger
talks with the UTI Bank advanced much further; in early January 2001, the
boards of both banks approved a merger on a swap ratio of 9 UTI Bank shares to
4 Global Trust Bank shares.
And then came
the catastrophe. The stock market greeted Yashwant Sinha's 2001 budget with
less than enthusiasm, and in an excess of loyalty, the Securities and Exchange
Board of India launched an enquiry into the crash. Amongst other things, Sebi
alleged that Ketan Parekh had bid up the shares of Global Trust Bank in the
wake of the merger talks. The swap ratio immediately became suspect, and Global
Trust Bank became untouchable. The merger talks broke down. Meanwhile, the
price of Global Trust Bank shares had tumbled from Rs 114 in November 2000 to
Rs 27 in early April 2001; that of UTI Bank shares had fallen from Rs 54 to Rs
27. Gelli lost RBI's confidence and resigned; his men in the management were
cut to size. The RBI installed its own CMD, R.S. Hugar, in June 2001 for a
while, who later gave over to Subhash Gande. But change of management could not
mend matters. After the UTI Bank affair, it was impossible for Global Trust
Bank to raise capital, and it clearly had a growing load of nonperforming
assets (now estimated at Rs 1000 crore).
The RBI has
known for two years that the bank was in trouble; an inspection report
identified its negative net worth as early as September 2002. Its figures were
inconsistent with those of the bank's auditors; that should have been
sufficient to wake up the RBI. Last December, the bank's negative reserves of
Rs 118.92 crore were close to its equity capital of Rs 121.36 crore. The RBI
has had ample notice; it will be difficult to avoid the suspicion that it has been
sleeping on its job.
The action it
finally took last week must also evoke disquiet. A moratorium is exquisitely
designed to inconvenience the bank's customers — the one group that has no
blame to bear. It is a time-honoured principle of banking that in a crisis, a
central bank must give a bank all assistance needed to prevent a run. Our
central bank does just the opposite — it tells the customers: "You fools!
You should have made a run before we took over the bank."
Finally, the
merger and the losses it will transfer are going to wipe out the profits of the
Oriental Bank of Commerce for a couple of years at least. It has done nothing
to deserve this punishment. It would have been cheaper for the RBI to pay off
all Global Trust Bank's legitimate liabilities and close it down.