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GTB: Shareholders the ultimate losers

Jul 26, 2004

One event the whole banking fraternity and the common man fears the most is the failure of a bank. The moratorium on Global Trust Bank's (GTB) activities is one such incident that has shaken up the banking sector, and with it, the confidence of a large number of investors and depositors. The failure of any bank is a very serious issue and can have a profound impact on the financial sector and its incumbents as a whole. The Reserve Bank of India (RBI) placed a moratorium on the operations of the bank on 24th July 2004 and depositors are now only allowed to withdraw a maximum of Rs 10,000 from the bank till the moratorium ends. The crisis in GTB is not sudden and the bank had been under RBI scrutiny for some time now. Problems of the bank stem mainly from its very large quantum of NPAs accumulated over a period of time. Consequently, higher provisioning for the same took a toll on its net worth, thus adversely impacting the capital adequacy of the bank. The bank had a large Rs 2.7 bn net loss in FY03 mainly due to large provisioning for its NPAs.

The woes of the bank were not only limited to poor operational performance. Its original promoter, Mr Ramesh Gelli, was implicated in the 2001 stock scam (involving Ketan Parekh). This had greatly tarnished the image of this new generation private sector bank. While the exact details of the financial state of the bank are still unclear, the RBI has announced that that Oriental Bank of Commerce (OBC) will take over GTB. The RBI has released a detailed statement regarding the procedure of the takeover and it can be viewed on the RBI website.

It is too early to say what kind of impact the takeover will have on the financial health of OBC as a detailed valuation of assets and liabilities will be carried out in the coming days, prior to the takeover. Once the terms of the takeover are clear, we will give an analysis on how OBC will be impacted by the same. One aspect is certain, the shareholders of GTB will be the ultimate losers, as they are not likely to get any shares in exchange of the takeover by OBC (a case similar to the PNB and Nedungadi Bank merger). This event again highlights the vulnerability of any organisation to poor management. As we have highlighted many a times before, the quality of management is one of the most important criteria investors need to look into before making any investments in the stock markets.

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