Global trust bank failure

Presentation on Failure of Global Trust Bank

1. GLOBAL TRUST BANK FAILURE Akshay Kulkarni Akhil Nasim Bhaskar Ghose Kartik Maniktala Meghna Shetty Nikhil Jain

2. CONTENT History of Indian Banking Banking reforms of 1990's Introduction Financials  The Scam Regulatory Actions Countdown to collapse  Effects on Shareholders Questions Raised Responsibility Conclusion Takeaways

3. HISTORY OF INDIAN BANKING The First B anks in I ndia : Bank of Hindustan (1770) and General Bank of India (1786) both closed down after some years of operations Reserve Bank of India came into effect on 1 st April 1935 (by RBI act 1934) Largest and Oldest bank (still in function) : State Bank of India   How it came about : Bank of Calcutta (1806)         Bank of Bengal (1809) -one of the 3 presidency banks                                                        Merged into                                                  Imperial bank of India   (1921)                                             Bank of Bombay   Bank of Madras                 After independence (1840) (1843) State Bank of India (1955) Followed by two rounds of Nationalization of Banks in 1969 and 1980

4. BANKING REFORMS of 90’s In the early 1990s, the government embarked on a policy of  liberalization, licensing a small number of Private Banks .  These came to be known as New Generation tech-savvy banks, and included Global Trust Bank ,  UTI Bank (since renamed Axis Bank), ICICI Bank and HDFC Bank.  This move, along with the rapid growth in the  Indian economy,   revitalized  the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely government banks,  Private  banks and Foreign banks.

5. INTRODUCTION Global Trust Bank was one of the earliest private sector banks in India founded in 1994 Founders - Ramesh Gelli , Sridar   Subasri and Jayant  Madhob First branch opened at Secunderabad , Andhra Pradesh Well known for its technology based innovations and responsive services Received ₹ 1 Bn in deposits on day 1, ₹ 10 bn by end of first year and ₹ 27 Bn at end of 3 years They had a customer attractive business model such as high deposit rates, no collateral requirements for loans, flexible timings

6. FINANCIALS As of March 31, 2003 Deposits : Rs 6920.91 crores Advances : Rs 3276 crores Gross NPA : Rs 915.82 crores Capital market exposure : Rs156 crores.  Capital adequacy ratio : 0.7%  

7. The scam… GTB was involved in the stock market scam of 2001, that the stock broker Ketan Parekh ran It lent heavily to him and related parties which were speculating in the stock market & tried manipulating their stock prices Misleading books of accounts Did this as they had plans for merger with UTI bank which would make them very strong in the banking sector Increase in the stock prices would have helped them increase their valuations When the market crashed the bank suffered extensive losses

8. REGULATORY ACTIONS 24 July 2004 - RBI 3 month moratorium on the operations of the GTB due to negative net worth & mounting NPAs RBI said don't panic, money is safe, it's only a moratorium & not a closure 26 th July - 11.20 AM Government announced merging GTB with Oriental Bank of Commerce (OBC), ensuring its survival. India has been creating the history of merging failed banks with bigger (Government) one’s B.D . Narang , OBC's CMD, said merger allows his bank to expand its operations in the South GTB’s White K night , New Bridge Capital gave offers to acquire the bank as it had experience in turning banks around but was denied

9. Continued… RBI's swift response to the crisis was appreciated, but sources said in February 2000, an Investors ' Grievances Forum urged both the RBI & SEBI to look into bank’s operations RBI even gathered substantial evidence of mismanagement in the bank Nothing happened until the Ketan Parekh scam broke out in early 2001 & not surprisingly showed that GTB was involved in it Fitch gave lowest rating to bank in 2003, while other agencies claiming bank to bounce back & also bank promised to infuse new capital Even when RBI & the Joint Parliamentary Committee was set up to probe the Ketan Parekh scam somehow Ramesh Gelli was exonerated by them

10. COUNTDOWN TO COLLAPSE Some actions/events which are the main reasons for collapse of the bank include Involvement of Ramesh Gelli in Ketan Parekh stock market scam RBI did find mismanagement of funds around 2001 only, but nothing was done Differences between balance sheet and audited nos. Breach of prudent lending norms, huge lending to stock market related entities Talks by promoters to raise fresh capital Rising NPA levels of bank

11. Effects on Shareholders RBI amalgamated Global trust Bank with Oriental Bank Of Commerce leaving GTB shareholders empty handed Small investors could not settle even after the merger announcement People had doubt on deal as OBC was most efficient bank at the time OBC witnessed sharp volatility on the stock market OBC filed the corporate action form with the depositories and the shares of the erstwhile Global Trust Bank were extinguished

12. Questions raised Public shareholders have been treated pretty shabbily  FII’s had been selling shares of GTB before the any public announcement making only retailers suffer OBC CMD Narang commented that he has been talking to RBI of possible merger for 3 months SEBI announcement of examining trade data wasn’t of use after Narang’s comment It took a mere 48 hours for the RBI to order the m erger RBI was keen to protect stakeholders b ut equity shareholders got nothing

13. RESPONIBILITY? Ramesh Gelli refused to take the blame for the failure of GTB Bulk of GTB’s total NPA of INR 15000 million, were from non priority sector creating doubt on lending norms being followed In two years between 1999-2000 and 2000-01 the bank’s capital market exposure went up to 30% of its total assets Market crash reduced the values of securities drastically & the bank could not recover from this

14. CONCLUSION The bank ran into the losses because of several players acting for own convenience This led to the sufferings for small, unwary and gullible investors & had to pay a heavy price U nethical practices of the promoters & dull attitude of regulators brought down the bank and its investors

15. Takeaways Publicizing the directions given to the banks by the regulator Measures like Prompt Corrective Actions are at high level today Banks should cover all the major incidences in annual reports compulsorily RBI owes it to depositors, borrowers and investors should take immediate actions unlike this case

16. THANK YOU