Global Trust Burst

It seemed like a happy ending to a Bollywood horror film. But it began like the worst-possible nightmare: the potential collapse of India's shining star among private banks. That was on Saturday the 24th, when the Reserve Bank of India (RBI) declared a virtual freeze on the operations of the Global Trust Bank (GTB). The central bank said that GTB's net worth had turned negative, it was incurring huge losses and was saddled with mounting non-performing assets (NPAs) or loans that cannot be recovered. As most of its one million depositors went into a tizzy—some depressed, a few volatile as they tried breaking the bank's ATMs—government officials went to great lengths to pacify them. The message: don't panic, depositors' money is safe, nothing will happen to the bank, it's only a moratorium and not a closure.

Within 48 hours—it's difficult to imagine the RBI acting so promptly—the situation was under control. At 11.20 Monday morning, the government announced that GTB will merge with Oriental Bank of Commerce (OBC), thereby ensuring that the former would survive and its depositors' money would be safe. But the RBI's actions threw up fresh questions about the role of the regulators. While the interests of GTB's depositors were safeguarded, its shareholders (51 per cent of its equity is held by small investors) were at their wits' end. It also seemed unclear whether the deal was a sweet one for OBC, one of the country's most efficient banks with zero per cent NPAs.

On the face of it, both OBC and GTB are gainers. B.D. Narang, OBC's CMD, says the merger allows his bank to expand its operations in the south, which is GTB's operational territory. Till now, OBC was predominantly a north-based entity with over two-thirds of its deposits, almost half its advances and the bulk of its branches in this region. Narang also gains an additional million customers, whose acquisition cost would have been at least Rs 100 crore. But even better is the tax break that Oriental Bank will enjoy in the near future. Since GTB's losses and NPAs can be set off against OBC's profits, the savings could be as high as 40 per cent of GTB's current liabilities, estimated at 20 per cent of its advances. "The decision to merge GTB with OBC is consistent with the RBI's approach in about half a dozen such cases during the last ten years when a failed bank was merged with a larger government-owned bank," says Ananda Bhoumik, vice-president of financial institutions at Fitch Ratings India.

But this is only part of the story. The financial gains to OBC are based on two important premises: one, that GTB has no other hidden NPAs and, two, that 40 per cent of these NPAs are recoverable. Even Narang has consistently maintained that two-fifth of the sticky loans can be turned into good ones and GTB's MD, Sudhakar Gande, has stated that most of GTB's NPAs are, in fact, performing ones. But if OBC doesn't manage to recover any of the NPAs, its balancesheet will be hit by approximately Rs 650 crore, even after the tax break. And if the NPA level rises, the impact would obviously be higher. The only advantage: OBC's high profitability ensures that it might be able to absorb the additional burden, if any.

Even the GTB shareholders have to grit their teeth and absorb losses. In fact, the RBI and the finance ministry have left them with no other option, thanks to the deal mediated by the regulators. As per the proposed merger, it seems that OBC will take over the assets and liabilities of GTB on its books, but there be will no share swap. What that means is that while GTB will be left with no assets or liabilities, its shareholders will not get any OBC shares. In effect, they become investors in a shell company. Logically, GTB's scrip value can only be zero—in fact, the scrip price plummeted 30 per cent on Monday and then by another 28 per cent on Wednesday. Over the next few days, the price will get as close to zero as possible.

Unless OBC decides to value GTB's franchise and brand and the valuation experts decide that OBC has to pay some amount to GTB for the proposed takeover. Jayant Madhab, GTB's co-founder, thinks that this should indeed be the case: "There was always tremendous goodwill for the bank and despite everything we always had very loyal customers. That was the true value of the bank," he says. Till now, no one knows what will happen but a payout is the only way the shareholders can benefit as GTB can then distribute the money it gets as dividends, and the scrip price may also creep up a bit. Kirit Somaiya, a former bjp MP who heads the Mumbai-based Investors' Grievances Forum (IGF), has little hope of this happening: "Various regulators and promoters have created a picture that GTB was being restructured. So, the developments of the last few days have shocked the small investors, who are the ones who will take the beating. As they are shareholders they will obviously be the last segment to be saved."

Listen to Somaiya carefully and he does have a point, especially about the role of the regulators and the promoters. And also about how the institutional and other large shareholders of GTB seemed to have managed to escape the predicament being faced by the small investors. To understand this part of the GTB saga, one has to cut to February 2000, when IGF urged both the RBI and the Securities and Exchange Board of India (SEBI) to "look into" GTB's operations. Nothing seemed to have happened until the Ketan Parekh scam broke out in early 2001 and, in fact, GTB's fortunes seemed to have been on the upswing in 2000 as it nearly finalised a merger with uti Bank in a bid to create the largest private sector bank in the country.

The Ketan Parekh scam revealed sordid details about wrongdoings in GTB. One of the allegations was that Ramesh Gelli, founder, GTB, joined hands with Parekh to rig the bank's scrip price to get a more favourable swap ratio in the proposed merger with uti Bank (see Box on Page 31). It was also revealed that GTB's exposure in the stockmarket was quite high and that it had dealings with dubious diamond merchants. Finally, Gelli had to resign as CMD and even quit the bank's board. But somehow, he was virtually exonerated by the RBI and the subsequent Joint Parliamentary Committee, which was set up to probed the Ketan Parekh scam.

At that stage, it was clear that the bank was in trouble and that its future was uncertain. Over the next few quarters, its financials reflected the malaise as it incurred losses and had to provide huge sums as NPAs. For example, in 2001-02, it suffered a nearly 60 per cent fall in net profits, a minor drop in net income, and had to write off NPAs of Rs 252 crore. The ratio of net NPAs to net advances for the year more than doubled to 9.23 per cent. And this was only the tip of GTB's NPA iceberg. The RBI inspection team, which pores into each and every detail of all the banks, found that even these figures were wrong. That GTB had deliberately fudged its accounts and hidden the actual level of NPAs and, hence, the RBI stepped in to monitor GTB's operations. And it found out that even the figures for 2002-03 didn't present the true picture of the bank's financials. According to Fitch, by March 2003, GTB's equity had almost turned negative. Given the weak financial condition of the bank, the rating agency had an outstanding individual rating of 'E(s)' on the bank for almost two years, which is the lowest possible rating on the individual rating scale.

However, publicly something else was happening. Reports by investment analysts in 2002-03 seemed to indicate that GTB's fortunes were changing for the better.One of the reports, dated August 23, 2002, stated that the bank was "making a valiant attempt to bounce back". It further noted that GTB had already written off "substantial part of its assets," and any further recoveries can only improve its bottomline. In a way, this investment firm was indicating that GTB was riding out the trough. By mid-2003, even GTB's management was doling out a string of good news. For instance, in June 2003, its managers explained how the bank had recovered Rs 300 crore of NPAs in the past 12 months. And that it had initiated an exercise to raise fresh capital to further improve its balancesheet; any fresh infusion would have prevented GTB's net worth from remaining negative.

GTB's latest white knight was New Bridge Capital, which had evidently asked for some forbearance from RBI, including reducing the face value of GTB shares from Rs 10 to Re 1 and was willing to pay a 6:1 swap value for it. "We gave a strong proposal to RBI in July (this year) for bringing in New Bridge, which has a track record for turning several major banks but the proposal was not approved by the regulator," confirmed Sudhakar Gande. While there has been precedence for this kind of thing in the past, the RBI refused to entertain GTB's proposal. And that signalled the end of GTB's attempts to survive as an independent entity. Now, the only options left were to either allow the bank to go bankrupt or to merge it with a stronger bank.

The RBI then announced the moratorium. Now, there are two surprising things that raise a number of questions. The first is that since the beginning of this year, institutional investors have been offloading GTB stock. Questions Somaiya, "We understand that 9 per cent of the equity was offloaded by overseas corporate bodies and foreign institutional investors in the last few days before the bubble burst. Our investigations reveal that 2-3 people of Indian origin are behind this movement. Just one of them sold 1.25 crore shares. So, the obvious question is whether some people knew what was happening but things were being manipulated so that some people could safeguard their personal (and commercial) interests?" If the answer is yes, then the small investors have been saddled with dud shares, while the biggies have managed to wriggle out.

What's even more surprising is the comment made by OBC's Narang that his bank had been talking to the RBI for nearly three months about a possible merger with GTB. If that's true, why did the RBI not announce the merger before the moratorium? Why did it have to create panic among depositors and shareholders? Why did it allow the situation to reach this stage when it was apparently monitoring GTB's operations for at least two years, if not more? More important, why did it allow a feeling to creep in public mind that things could get better? Both the RBI and the finance ministry needs to provide these answers, only to convince GTB's small shareholders that there's nothing more than what meets their eyes in the OBC-GTB merger.