The Rise and Fall of Global Trust Bank

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Case Details:

Case Code : FINC038
Case Length : 16 Pages
Period : 2000 - 2004
Pub. Date : 2005
Teaching Note :Not Available
Organization : Global Trust Bank (GTB)
Industry : Banking
Countries : India

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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"GTB had been sliding for several months now. Perhaps enough vigilance was not maintained in the past."¹

- P Chidambaram, Union Finance Minister of India.

"I would have loved to see Global Trust Bank remain as an independent entity, but in the best interests of depositors and employees this is the best decision."²

- Ramesh Gelli, Founder Promoter, Global Trust Bank (GTB).

"It is a big relief that GTB is to be merged with Oriental Bank of Commerce. I have decided never to park any money with a private sector entity."³

- A Depositor of GTB.

The Moratorium

On July 24, 2004, the Government of India imposed a moratorium on Global Trust Bank (GTB), a leading private sector bank, on the grounds of 'wrong financial disclosures.'

The moratorium was for three months from close of business on July 24, 2004 till October 23, 2004. Earlier, the Reserve Bank of India (RBI)⁴ had announced that GTB's net worth⁵ had turned negative as it had incurred huge losses and accumulated a significant number of non-performing assets (NPAs).⁶ RBI stated that the numbers reported in GTB's balance sheet did not match its audited figures. Moreover, GTB failed to provide satisfactory explanations to most of RBI's queries regarding its capital market exposures and why prudent lending norms were not observed in disbursing huge amounts for investments in the stock market. RBI said the moratorium was imposed in public interest and to protect the interests of depositors.

All operations of GTB were frozen and it was ordered not to give loans without RBI permission. It was allowed only to make payments for day-to-day operations or for meeting obligations entered into before the order.⁷

Background Note

The liberalization process initiated by the Government of India, during the early 1990's witnessed the entry of several private players in the Indian banking sector. GTB was one of the earliest private sector banks to be incorporated on October 30, 1994, in Hyderabad.⁸ GTB was promoted by Jayant Madhab (Madhab), Ramesh Gelli (Gelli) and Sridhar Subasri (Subasri). Madhab, a development banker, was employed with the Asian Development Bank, Manila. Gelli who was Chairman of Vysya Bank for10 years had played a major role in transforming that bank into one of India's top private sector banks. Subasri was a former bank executive and a close friend of Gelli.

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1] "GTB Forced to Merge," www.news.bbc.co.uk, July 26, 2004.

2] Ray Marcelo, "Indian central bank tells Global Trust to merge," www.news.ft.com, July 26, 2004.

3] "GTB Shareholders Could Be Left in a Lurch," www.domain-b.com, July 17, 2004.

4] Established in 1935, RBI is the central bank that regulates and supervises the financial system in India. It is the banker to the government and all scheduled banks in the country. Its important functions are to prescribe broad parameters of banking operations within which India's banking and financial system functions, to maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public; formulate, implement and monitor the monetary policy, maintaining price stability and ensuring adequate flow of credit to productive sectors; and foreign exchange control.

5] Net worth is the difference between a company's total assets less total liabilities.

6] NPA means advances that have turned bad because interest or principal is outstanding for more than 90 days.

7] GTB's depositors could withdraw only Rs 10,000 during the moratorium period from savings accounts, current accounts or any other deposit account; and the withdrawals would be only through bank branches and not from any of the ATMs across the country as ATMs of the bank were disabled. In specific cases, including emergencies like medical expenses, higher education, obligatory expenses like marriage customers were allowed, by a general or specific order of RBI, to draw up to Rs 100,000.

8] Hyderabad is the capital city of Andhra Pradesh, a Southern state in India.