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The Fall of Global Trust Bank': BY: Rajeev Kumar Akash Jain Shashidhar Ashwani Atul Agrawal

The document summarizes the collapse of Global Trust Bank in India in 2004. Key points include: - RBI imposed a moratorium on GTB on July 24th, 2004 for wrong financial disclosures, freezing its assets and operations for 3 months. - Inspections revealed GTB's net worth was negative and capital adequacy ratio was below requirements. Its bad loans and exposure to capital markets increased risks. - Oriental Bank of Commerce expressed interest in an acquisition and RBI approved a merger scheme effective August 14th, 2004 to protect depositors and integrate GTB's branches and employees into OBC. - The crisis eroded confidence in banking stocks and had effects on both private and

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118 views35 pages

The Fall of Global Trust Bank': BY: Rajeev Kumar Akash Jain Shashidhar Ashwani Atul Agrawal

The document summarizes the collapse of Global Trust Bank in India in 2004. Key points include: - RBI imposed a moratorium on GTB on July 24th, 2004 for wrong financial disclosures, freezing its assets and operations for 3 months. - Inspections revealed GTB's net worth was negative and capital adequacy ratio was below requirements. Its bad loans and exposure to capital markets increased risks. - Oriental Bank of Commerce expressed interest in an acquisition and RBI approved a merger scheme effective August 14th, 2004 to protect depositors and integrate GTB's branches and employees into OBC. - The crisis eroded confidence in banking stocks and had effects on both private and

Uploaded by

Dipesh Jain
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© Attribution Non-Commercial (BY-NC)
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You are on page 1/ 35

THE FALL OF GLOBAL TRUST BANK

BY: RAJEEV KUMAR AKASH JAIN SHASHIDHAR ASHWANI ATUL AGRAWAL

GOING AHEAD
A BRIEF BACKGROUND OF GLOBAL TRUST BANK

EVENTS OF 24th,JULY 2004


CONTDOWN TO COLLAPSE OF GTB

WHAT WENT WRONG WITH GTB?


ROLE OF RBI EFFECT ON STOCK MARKET RESCUE OF GTB

TO BEGIN WITH...
FAILURE OF A

BANKTHE FEAR FACTOR

CAN HAVE PROFOUND

IMPACT ON THE FINANCIAL SECTOR

MORATORIUM ON GTB

IS ONE SUCH INCIDENT

A BRIEF BACKGROUND NOTE


LIBERALISATION

PROCESS STARTED DURING EARLY 1990S ENTRY OF SEVERAL PRIVATE SECTOR BANKS GTB INCORPORATED ON 30th OCTOBER 1994 IN HYDERABAD

Mr.RAMESH GELLI,ONE OF THE PROMOTERS OF GTB

4O PERCENT CONTRIBUTION BY CORE

PROMOTERS EQUITY PARTICIPATION FROM IFC AND ADB GTB HAD A NETWORK OF 104 BRANCHES AND 275 ATMs IN 34 CITIES ACROSS THE COUNTRY

MORATORIUM
THE MORATORIUM IS

AIMED AT FREEZING THE ASSETS AND LIABILITIES OF A BANK IN ORDER TO PROTECT THE BANKS HEALTH FROM FURTHER DETERIORATION. IT ALSO PROVIDES AN OPPORTUNITY FOR A POTENTIAL ACQUIRER TO EVALUATE THE FINANCIAL POSITION OF THE BANK

24th JULY,2004

GOVT. OF INDIA IMPOSED MORATORIUM ON GTB ON

GROUNDS OF WRONG FINANCIAL DISCLOSURES FROM CLOSE OF BUSINESS ON JULY 24th,2004 TILL OCTOBER 23rd,2004 ALL OPERATIONS OF GTB WERE FROZEN DEPOSITORS WERE ALLOWED TO WITHDRAW A MAXIMUM OF Rs 10,000

COUNTDOWN TO COLLAPSE OF GTB


For the last three years,GTBs audited balance sheet for March 31, 2002, showed net worth of Rs 400.4 crore & a profit of Rs 40 crore. However, when RBIs inspection revealed that net worth is negative. an independent chartered accountant was appointed to reconcile the position. GTB was placed under directions relating to certain types of advances, certain premature withdrawal of deposits, declaration of dividend and its capital market exposure. RBI also started monitoring GTB on monthly basis.

Cont

On March 31, 2003, GTB announced deposits of Rs 6,920 crore and advances (loans) of Rs 3,276 crore. On its balance sheet, it showed gross non-performing assets of Rs 915 crore while total provisions (against bad loans) were Rs 268 crore. Even though the financial statements show an overall loss, the bank has made an operating profit for the year 2002-03.

Cont..

RBIs inspection showed that banks net worth has further eroded and capital adequacy ratio (CAR) was negative.

CAR = capital / total assets

GTB was advised to take immediate steps to infuse fresh capital to restore its CAR to 9% Bank was advised to explore options of raising capital through domestic sources or through merger with another bank.

GTBs RESULT FOR THE YEAR 2003-04


DEPOSITS

Rs 6920 crores ADVANCES Rs 3276 crores EXPOSURE Rs 1560 crores CAP. ADEQUACY RATIO -0.7% RETURN ON ASSETS -3.5% GROSS NPA Rs 1200 crores

WHAT WENT WRONG WITH GTB?


PROMOTER RAMESH GELLIS LINK WITH

KETAN PAREKH

BANKS CAP. MKT. EXPOSURE WENT UP AS A RESULT NPAs INCREASED

RBIS ROLE

In 2002,RBI inspection revealed that bank net worth is negative. Chartered accountant was appointed to reconcile the position. RBI also starts monitoring GTB on monthly basis. RBI inspection showed that bank net worth has further erode & CAR was negative RBI removed banks auditors & complained about them to ICAI.

Cont..

1.
2. 3.

Moratorium imposed to 3 months from July 24,2004 to October 23,2004 Moratorium imposed to protect interest of depositors. RBI banned the operation:ordered not to give loan without RBI permissions Allowed payments for day to day operation. Depositors allowed to withdraw maximum of Rs 10000

Cont

1.

2.
3.

Permit GTB upto Sept 30 to publish annual reports. OBC gave the RBI its letter of interest in the second week of July. OBC interest was examined by RBI:Keeping view its financial parameters Its retail network & its synergies as well as strategic advantages. Taking into account the interest of depositors of GTB as well as strength & weaknesses.

Cont.

RBI zeroed in on OBC as the banks NPA level had come down recently. Option available with RBI was to compulsory merger under section 45 of Banking Regulation Act 1949. RBI thrashed out all merger modalities like safeguarding the depositors money & retention of employees. sanction scheme for amalgamation of GTB with OBC & come into force on august 14,2004.

OUTCOME OF THE GLOBAL TRUST BANK CRISIS

CRISIS OFCONFIDENCEIN BANKING STOCKS

BANK WAS PLACED UNDER MORATORIUM

EFFECT ON 1. PRIVATE SECTOR BANKS 2. PUBLIC SECTOR BANKS

THE CRISIS OF CONFIDENCE IN BANKING STOCKS

After the GTB crisis knocked-off a good 6.18% from the market capitalization of 31 bank stocks with in 10 days. These 31 banks, making up 81% of the total Sample of 38 listed banks, reported val-ue erosion ranging between 1.1% and
19% since july 26.

THE BANK WAS PLACED UNDER A MORATORIUM


The GTB script lost 78% in value and due to it since the day the bank was placed under a moratorium. The market value of these 31 banks eroded by a whopping Rs 5478cr. From Rs.88721cr. on july 26 to Rs 83243cr. on august 5. In comparison the BOMBAY STOCK EXCHANGE`S bankex gained 1.09%.

EFFECT ON PRIVATE SECTOR BANKS


CENTURIAN BANK`S capitalization dropped- 19.0% DHANALAKSHMI BANK dropped14.3%, UNITED WESTERN BANK dropped14.0%, ING VYSYA BANK dropped11.0%.

The Private Banks that posted positive returns wereIDBI BANK UPICICI BANK UPJ&K BANK UP03.5%,& KOTAK MAHINDRA BANK UP11.4%, 05.3%,

01.7%.

EFFECT ON PUBLIC SECTOR BANKS Among the 19 listed Public Sector Banks, 16 reported a drop in prices. Among them ORIENTAL BANK OF COMMERCE which came to the rescue of GTB, emerged as the largest loser with a 12% drop in mar-ket price. OBC was followed by the BANK OF BARODA-DENA BANK-PNB-06.9%,& SBI-10.4%drop, 10.0%,

06.8%.

THE CULPRIT!!!!!
WELL.WHOM TO BLAME FOR THE COLLAPSE OF GTB?

THE COLLAPSE OF THE MARKET ?

WE CAN SAY THAT AS A SYSTEMATIC PROBLEM!!!!

TOO MUCH RISK.

PERHAPS THE BANK HAD TAKEN A VERY AGGRESSIVE STANCE

THE RESCUE MAN

OBC SHOWED INTEREST TO MERGE WITH GTB RBI EXAMINED OBCS FINANCIAL PARAMETERS,ITS

RETAIL NETWORK,SYNERGIES AS WELL AS STRATEGIC ADVANCES RBI PREPARED A DRAFT SCHEME FOR AMALGAMATION AMALGAMATION CAME INTO FORCE ON AUGUST 14th,2004

CONTINUED..
ALL BRANCHES OF

GTB STARTED OPERATING AS BRANCHES OF OBC CUSTOMERS OF GTB STARTED TO OPERATE THEIR ACCOUNTS AS CUSTOMERS OF OBC

EMPLOYEES
GTB EMPLOYEES

STARTED TO WORK AS EMPLOYEES OF OBC

GOT THE SAME

SALARY PACKAGE

THE BEST MATCH


WHILE WEAKNESS OF

GTB WAS BAD ASSETS ,STRENGTH OF OBC WAS RECOVERY OBC GOT A MUCHNEEDED EDGE IN THE SOUTH BOTH THE BANKS HAD A COMMON CORE BANKING SOLUTIONFINACLE

GLOBAL TRUST BANK IS NOW ORIENTAL BANK OF COMMERCE

REFERENCES

www.domainb.com/finance/banks/global_trust_bank/20040727_bankrup tcy.html icmr.icfai.org/casestudies/catalogue/Finance/FINC038.htm www.banknetindia.com/board/817.html http://www.rediff.com/money/2004/aug/02guest3.htm http://www.hindu.com/2004/08/23/stories/2004082300351500. htm www.hinduonnet.com/businessline/iw/2001/06/17/stories/0717 g055.htm....

ANY.........

Mr B.D. NARANG CMD OF OBC IN AN ITERVIEW TO BUSINESS LINE HAD SAID..


SEE I WILL BE VERY HONEST. GTB HAS BECOME HISTORY.THIS BANK DOESNT EXIST ANYMORE. SO, THE SHARE CERTIFICATE TODAY IS AS GOOD AS A TOILET PAPER

COST OF ACQUIRING GTB


FOR THE MERGER OBC ACQUIRED AROUND Rs

47.5 BILLION OF TOTAL ASSETS AS AGAINST LIABILITIES OF Rs 60 BILLION THIS LED TO A SHORTFALL OF Rs 12.5 BILLION OF THIS OBC SAVED Rs 6 BILLION THROUGH A TAX-BREAK IT HAD TO FILL A GAP OF Rs 6.5 BILLION,WHICH CAN BE CONSIDERED AS THE COST OF ACQUIRING GTB.

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