Case Study of Merger of Global Trust Bank &amp Essay Example

innovative establishment by Ramesh Gelli that saw its Initial Public Offering outdo expectations by getting oversubscribed a hundredfold. The bank also managed to secure investments from International Finance Corporation - a subsidiary of World Bank engaged in equity provision. Gelli fashioned this bank on Vysya Bank's structure and brought numerous seasoned managers onboard from there.

Secunderabad served as the hub for his operations, from where he extended his influence across Andhra Pradesh. Global Trust Bank stood out with its pioneering efforts in computerization and online banking. The bank operated two hours longer than typical business hours, offered the flexibility of carrying out transactions at any counter or branch, and also acted as a mail forwarding service for its clients. In its initial two-and-a-half years, it earned more than its equity capital. However, this region-centric approach hit a roadblock; around the start of the millennium, the bank faced a capital crunch leading Gelli to contemplate growth through mergers.

While HDFC Bank and IndusInd Bank embarked on negotiations, they failed to reach a consensus. Substantial progress was made in the merger discussions with UTI Bank and by the beginning of 2001, both banks' boards consented to the merger with a swap ratio of 9 shares of UTI Bank for every 4 shares of Global Trust Bank. Nonetheless, catastrophe ensued after this occurrence. The lukewarm market response to Yashwant Sinha's 2001 budget triggered an investigation by The Securities and Exchange Board of India (SEBI) into the dramatic decrease.

Sebi accused Ketan Parekh, among other things, of artificially inflating Global Trust Bank's shares in the aftermath of merger discussions. This suspicious action cast doubt on the

swap ratio and caused Global Trust Bank to fall out of favor. As a result, negotiations for the merger collapsed. During this period, the value of Global Trust Bank's shares had plummeted from Rs 114 in November 2000 to Rs 27 in early April 2001; similarly, shares of UTI Bank fell from Rs 54 to Rs 27. Gelli lost the trust of the RBI, prompting his resignation while his staff was reduced in number. Following this situation, the RBI put R.S. at the helm as its new CMD.

Although Hugar assumed responsibility in June 2001, it was merely a provisional change as Subhash Gande subsequently took over. Nevertheless, the management transition didn't resolve the prevailing issues. The following scandal with UTI Bank hampered Global Trust Bank's ability to generate capital and it was apparent that its non-performing assets were steadily increasing. RBI had been aware of the bank's dilemma for two years, with an audit report dating back to September 2002 emphasizing its negative net worth. There existed a discrepancy between this report and figures from the bank's auditors which should have alarmed those within the RBI.

In December 2002, the bank was confronted with a challenging situation of possessing negative reserves totaling approximately Rs 118.2 crore, almost matching its equity capital of Rs 121.36 crore. Being based in Hyderabad, GTB exhibited all the fundamental elements that could precipitate its downfall. It started with questionable loans granted to entities associated with the stock market, exceedingly high volumes of bad assets, inadequate provisioning, a deficient net worth and auditors who gave an overly positive depiction of its financial status. Additionally, there was a board

that neglected its responsibilities. The bank had cornered itself into a dilemma from which it couldn't escape – every conceivable issue that can negatively impact a bank had alarmingly transpired in GTB's situation.

A comprehensive assessment of the bank's financial missteps necessitates an exhaustive examination of its fiscal documents. GTB maintained deposits amounting to Rs 6,921 crore and extended loans totaling Rs 3,276 crore. A large portion of this borrowed sum, approximately Rs 1,500 crore was tied up in non-performing assets alone. Ramesh Gelli, the inaugural chairman and initiator of the bank highlighted that these errors stemmed from dependence on officers with insufficient decision-making skills. He further mentioned that those accountable individuals have been pinpointed by the bank's committee and consequently dismissed. The bank encountered losses due to over-engagement in capital markets in 2001 which led to escalating Non-Performing Assets (NPAs) and a decline in book quality. Sudhakar Gande, GTB's managing director elucidated that their primary issue emerged from their historical asset book while other segments of the bank functioned satisfactorily. In spite of the balance sheet for 2001-02 showing a net value of Rs400.40 crore; upon probing by RBI it was discovered to be negative.

RBI inspectors noted significant discrepancies between GTB's financial condition as stated by its auditors and their own evaluation. Subsequent to the identification of these discrepancies, RBI imposed specific directives on the bank (pertaining to certain advances, premature deposit withdrawals, dividend declarations and capital market exposure). The bank was directed to change its auditors too. In September 2003, RBI observed that despite the financial reports reflecting a total loss, the bank marked an operational profit for the fiscal

year 2002-03.

The Reserve Bank of India (RBI) sanctioned the Global Trust Bank's (GTB) and its regulatory authorities' proposed resolution for correcting their fiscal documentation. In November 2003, due to an inadequate capital adequacy ratio, GTB was mandated by RBI to augment its capital until it returned to 9 percent and formulate a strategic recovery blueprint. In counteraction, GTB contemplated domestic fund-raising or a potential merger with another financial institution; they also proposed that NewBridge Capital might contribute $200 million to the bank at the start of July. However, this proposal was promptly rejected by RBI.

The collapse of GTB, headquartered in Hyderabad, seems to be largely due to its own missteps. Factors leading to its demise include unethical lending activities related to stock market entities, an extremely high ratio of non-performing assets, insufficient provision and negative net equity. Compounding these issues was the misleading portrayal of its financial health by auditors, along with a neglectful Board that failed in performing their responsibilities. As a result of these factors, the bank plunged into an uncontrollable predicament. The mystery remains as to how it managed to remain solvent for three years after the 2001 market scandal without adhering to appropriate standards.

Despite the Joint Parliamentary Committee investigating the 2001 scam and finding no negative evidence against the promoters of GTB, the central bank remained skeptical. An elegantly crafted moratorium was put in place to disrupt the bank's clientele - a group that holds no responsibility for the circumstances. In a banking crisis, it's a long-established principle for the central bank to extend all necessary help to prevent a banking run. The central bank

followed this principle. While allowing GTB ample opportunity to rectify their mistakes, the RBI continued keeping a rigorous watch on its operations.

The central bank's decision to impose a freeze followed by an announcement that GTB would be merged with OBC is a puzzle shrouded in enigma. This arises particularly because of the bank’s earlier statement which praised the private sector bank's balance-sheet tidy up endeavor. This decision was mysterious especially as the RBI had previously lauded the private bank's initiative to clean up its balance sheets. Vinod Rai, the additional secretary of banking in the Union finance ministry revealed that the merger suggestion was put forth to RBI by the board of OBC. Consequently, the ministry's involvement in this process was limited. Nevertheless, the final approval came from them as OBC is a government venture. When queried about the wisdom of combining a profit-generating PSU with a loss-incurring bank, he refrained from commenting. He noted that while the RBI primarily oversees the output and role of private sector banks, their purview is restricted to public sector banks - all of which are faring well. An unnamed chairman originating from a southern bank opined that GTB's issues can be channeled back to incompetence in management - they had an unruly credit portfolio and a high amount of non-performing assets.

The financial institution held relatively limited assets, with a lack of adequate capital hampering its ability to recover from the losses incurred over the past two to three years. This lead to a negative net worth situation. It's vital for a bank to maintain an appropriate credit portfolio and implement effective strategies. The RBI,

in its supervisory capacity, protected the interests of depositors by orchestrating a merger between GTB and OBC. This outcome followed a protracted period of anticipation during which it was expected that GTB would find a strategic partner and comply with set prudential regulations. However, due to no substantial headway towards these objectives, the decision was made to merge GTB into OBC.

The verdict indicates a favorable outcome for OBC, functioning as a compact bank with a restricted quantity of branches, predominantly in the southern territory. OBC possesses no net non-assessable assets. The banker articulated that while this consolidation might not be advantageous, it can't be considered detrimental to OBC either," Orient Bank of Commerce's origin story is tied to its establishment by Lala Sohan Lal in Lahore back in 1943. Since then, the RBI has chosen it for merging with the beleaguered GTB. In technical language, GTB represents the third financial institution to unite with OBC, signifying the most significant merger throughout the bank's short-lived history.

In the 1990s, the bank acquired two distressed cooperative banks named Bari Doaba Bank, Hoshiarpur and Punjab Co-operative Bank, Phagwara. This was a significant incident for a somewhat calm north Indian bank; merging with a 100-branch GTB, as per a bank executive's statement. Prior to the merger, OBC had nearly 1,000 branches, but this number rose following the integration. The bank's journey began on February 19, 1943 in Lahore and within just a four-year span, it had to contend with the traumatic aftermath of partition. Subsequently, the bank relocated its main office to Amritsar. Lala Karam Chand Thapar, who was the chairman of the bank at

that time, ensured that all obligations to its Pakistani customers were fulfilled.

The bank's main headquarters was eventually moved to Delhi. The process of nationalization occurred in 1980, and by that time, it had established a network of 307 branches with deposits valued at Rs 282.61 crores and advances amounting to Rs 152.69 crores. Following this, there was a significant growth in its operations. In the financial year of 2004-05, the bank reported an operating profit of Rs 1,533 crores and a net profit of Rs 686 crores respectively. Notably, it provided a dividend return rate of fifty percent for its shareholders. There was also an impressive reduction in its gross Non-Performing Assets (NPA) from roughly seven percent in the fiscal year 2002-03 to nearly six percent and successfully eliminated net NPAs - an admirable accomplishment for any banking establishment . At present, OBC has an estimated net worth of Rs 2,676 crores.

To sum up, the suggested merger and subsequent financial deficits could potentially wipe out the profits of the Oriental Bank of Commerce for numerous years. Such a negative outcome is unfair to the bank. The Reserve Bank of India (RBI) would have found it more cost-efficient to clear all valid debts of Global Trust Bank and then close it. Recent times have seen several consolidations in banking, with private banks merging with those in public sector, signifying a pattern towards unification in this industry. However, these unions are primarily driven by crisis situations. It remains uncertain if future amalgamations will happen without such crisis events acting as triggers.

The Indian government has sanctioned the merger of Global Trust Bank

Ltd. with Oriental Bank of Commerce, which will take effect from August 14, 2004. As of this date, all Global Trust Bank Ltd. branches will operate under the banner of Oriental Bank of Commerce. In addition, customers and depositors at Global Trust Bank Ltd will be seamlessly transitioned to become clients of Oriental Bank of Commerce from August 14, 2004. The Oriental Bank of Commerce is implementing necessary measures to ensure an uninterrupted service experience for its incoming clientele from the Global Trust Bank Ltd.

As per the Consolidation Strategy, any remaining surplus after settling all obligations from Global Trust Bank Ltd.'s asset dissolution may be distributed to shareholders on a pro-rata basis. As part of this consolidation effort, Oriental Bank of Commerce (OBC) is expected to receive Income Tax waivers during GTB's asset transfer into its accounts amid their merger. Furthermore, any non-performing loans from the merged bank will be offset against cash assets and reserves held by the Hyderabad-based financial entity. OBC holds aspirations of improving GTB's financial state within a year. OBC’s head B.D Narang believes that GTB’s circumstances are beneficial as they mutually enhance each other.

Despite Global Trust Bank's (GTB) struggles with poor assets, Oriental Bank of Commerce's (OBC) forte lies in its recovery abilities. GTB's foundation in the south can provide OBC with a vital advantage within the southern region. In addition, they both utilise the central banking system "Finacle," which will aid their integration. The Reserve Bank of India proposed an amalgamation plan for GTB and OBC; to be precise, GTB was put under a Moratorium Order on July 24, 2004. The choice the Reserve Bank

had was to enforce a mandatory merger under section 45 of the Banking Regulation Act, 1949.

The Reserve Bank of India assessed the Oriental Bank of Commerce's (OBC) interest by taking into account its financial metrics, widespread retail network, and strategic synergies and benefits. It also drafted a plan for merging Global Trust Bank (GTB) with OBC, keeping in mind the interests of GTB’s numerous depositors as well as the bank's strong points and weak spots. The Indian Government then sanctioned this merger scheme between GTB Ltd. and OBC. This consolidation was executed on August 14, 2004.