YET ANOTHER BANK COLLAPSES IN INDIA
Some years back Global Trust Bank collapsed and its depositors were made fools, made to run from pillar to post to get back their deposits and wait anxiously. Reserve Bank of India, which was responsible for the collapse of Indian Bank, could be blamed for this also. Now after several years, everybody has forgotten this scam. New scams like 2G spectrum, Adarsh Housing Society, Commonwealth Games, ISRO and other scams are seeing the day of the light. Therefore RBI’s role in Global Trust Bank’s collapse is unlikely to be raked up or remembered. In fact
after a few years, everybody will forget the Rs.176000 crore 2G spectrum scandal and Raja will be a Union Minister again. For the opposition parties and the public, I have narrated the collapse of Global Trust Bank a few years back.The banking scenario is not good in India. Yet another bank namely Global Trust Bank has collapsed like a pack of cards without giving a chance to the public to withdraw their money. One-week back the bank’s doors were shut down, leaving the deposit holders high and dry. Their hard earned money has been lost at least temporarily. However, the central bank of India namely Reserve Bank of India has made arrangements to merge the collapsed bank with a strong Government owned bank Oriental Bank of Commerce. Oriental Bank of Commerce is enjoying customers’ confidence and a brand image. It is also a well-managed bank. In India, a well-managed bank means a bank, which has low non-performing assets in its balance sheet. Naturally a strong bank like Oriental Bank of Commerce would not have liked to take over a very weak bank like the Global Trust Bank whose name has been marred in the banking industry due to involvement in various scandals. That the bank has agreed to take over the Global Trust Bank indicates in unmistakable terms that the Reserve Bank of India has forced it to do so.
In a way all the deposit holders of the Global Trust Bank have welcomed the RBI’s decision because now their money would be well protected. However, in the corporate circles, eyebrows are raised and the issue is endlessly debated over whether it will send the right signals to the foreign investors who want to establish a base in India. First of all, it was the failure of the RBI, which saw the collapse of the Global Trust Bank. Indications were available even three years back when the bank was involved in undesirable financial activities and was living beyond its means. But at that time the issue died with the resignation of the then Managing Director Ramesh Gelli. Now the RBI has admitted that the balance sheet submitted by the Global Trust Bank as on 31.03.03 was incorrect. Many questions are raised in the banking circles not about the collapse of the Global Trust Bank but about the role of the central bank of India to monitor and deal with such crises effectively as is the duty of a central bank of a nation.
Firstly, why did the RBI not act when the Global Trust Bank crisis erupted first three years back? Why was the RBI silenced at that time? Secondly, the RBI is now admitting about the incorrectness of the balance sheet of the bank as on 31.03.03. But what did the RBI do one year back to make the bank take effective remedial steps to avoid such a situation? What was the purpose of collecting so many management information statements by the RBI from all the banks when they were not effectively analyzed and put to use to prevent financial crises erupting? After all prevention is better than cure under any circumstance.
The RBI was criticized in a similar situation when a fully government-owned bank namely Indian Bank went bust about a decade back. Indian Bank’s Chairman and Managing Director brazenly violated all discretion and sanctioned millions and millions of rupees loans and advances to corporate bodies with doubtful integrity. The RBI had its representative in the board of Indian Bank but its representative probably was sleeping during board meetings because the RBI did not question any of the decision of the CMD of Indian Bank. Not only that, the RBI even extended the tenure of the CMD several times so that he created a history in the banking industry in India to have worked as a CMD for a long period of seven years.
Global Trust Bank was established in the beginning of last decade when Indian Banking and Insurance sectors experienced the opening of the economy in the process of liberalization when Mr.ManMohan Singh, now the Prime Minister of India was the Finance Minister. The bank was established with a paid up capital of Rs.100 crore (rupees one billion) which was the minimum amount of paid-up capital a newly established bank was required to have to do
business in India. Mr.Ramesh Gelli who developed another private bank Vysya Bank Limited to a great extent headed the bank. But Ramesh Gelli’s flair in developing the Global Trust Bank within a short span of time made him to invest a lot of the public money in financial instruments that invited risk and the bank faced a major crisis three years back. Gelli resigned.As the public had a lot of confidence in Gelli’s ability, they deposited a lot of money with the bank. Today the government has allowed them to withdraw only upto Rs.10000 from their accounts. The bank reported a net worth of Rs.400 crore (rupees four billion) in its balance sheet last year but the RBI auditors have found the net worth to be negative. In other words, the accumulated losses of the bank had eaten away its net worth, which was camouflaged, cleverly by the bank with the help of the auditors who have audited the balance sheet. Now what action the government is going to take against these auditors? The RBI has appointed independent Chartered Accounts to reconcile and find out the true position. These Chartered Accountants found out the true position and reported it to the RBI.
The bank’s financial figures are nothing to boast about. The bank was burdened with net non-performing assets worth Rupees nine billion. Deposits stood at Rupees seventy billion. Loans and advances stood at Rs.32 billion. The capital market exposure of the bank was at Rs.1.5 billion. In India, all the banks require maintaining a capital adequacy ratio of 9% of their risk-weighted assets but the Global Trust Bank’s ratio was negative at –0.07%. The Reserve Bank of India advised the bank to either raise sufficient capital in the market to increase its capital adequacy ratio to the statutorily fixed level of 9% or else to merge with other bank. The bank came out with a proposal to restructure its financials in July 2004 but the RBI has found it unacceptable and advised the government of India to declare a moratorium against the bank.
In the history of banking in India, the government has ordered moratorium on three other banks namely the Nedungadi Bank, Banaras State Bank and a local area bank in the state of Gujarat. Nedungadi Bank was amalgamated with Punjab National Bank and Banaras State Bank was merged with Bank of Baroda in similar fashions as is taking place now. Global Trust Bank was rumoured to be merging with UTI Bank in the year 2001 that however did not materialize. The bank was involved in stock market scandal in the year 2001 and there was a run on the money by the depositors in the year 2002. The Joint Committee of Parliament in India which submitted its report in December 2002 on the securities scam had clearly noted that the exposure of GTB to the capital market during the year 2000 by way of advances against shares and guarantees issued on behalf of the brokers was relatively larger and that the bank had a very high exposure to a particular stock broker. The Joint Committee also found that the exposure of GTB to capital market was in excess of the limit prescribed by the board of the bank. But the board of GTB ratified such excesses every time and the situation continued beyond questioning and controlling by any authorities. Curiously the Joint Panel report was not acted upon either by the government of India or by the RBI. The reason is that there is a widespread corruption in almost all spheres of activities in India. Culprits can simply get away from anything and everything they do by bribing the right authorities with right amount of money. Therefore there were enough indications to warn the RBI that things were not in order in the affairs of the bank. However, the RBI always prefer to act after a crisis has fully blown and does not think of taking effective steps to prevent one from taking place.
Whatever might happen, the bankers and the government ably aided by the central bank of India have made the depositors fools. Foreign investors should be very careful in dealing with Indian Banks. For example even a fully government owned bank like Indian Bank has seen its net worth wiped out by the accumulated losses worth over Rs.30 billion. How can foreign investors and customers deal confidently with a bank like Indian Bank, which has even foreign branches like the one in Singapore? The foreigners should ponder their mind and take correct decisions before their money is also lost due to inefficient banking management in India and widespread corruption.
