Breach of trust

The extraordinary events surrounding the Global Trust Bank raise several questions—about the quality of private bank managements, the auditing process, RBI supervision, and crisis management.

To take the last point first, since it has been announced that GTB will be merged into the public sector Oriental Bank of Commerce, in less than 48 hours of the three-month moratorium imposed on GTB last Saturday, the obvious question is whether the two steps could not have been dovetailed in order to prevent a lot of week-end panic and anxiety among the bank’s million-strong customers.

Oriental seems to have been in talks with the RBI for a couple of months; if the deal was already in the works, surely the two steps should have been merged into one.

The RBI’s handling of the matter can be questioned for other reasons as well. It has been known for some time that the bank was in trouble—the main promoter was asked to step down from executive positions three years ago, an interim chief executive left in short order, the bank’s accounting year was extended last year, auditors were changed not once but twice, and proposals for new equity injection (aired in the press for many months) were taking time to fructify.

So there were many warning signals. But the RBI seemed to give the bank a clean chit some months ago, and the promoter even returned to the bank’s board (only to step down again!).

It is also not clear whether the RBI should have summarily rejected the Rs 1,000 crore equity injection proposed by the bank management in early July, on the grounds that some regulatory forbearance had been sought.

Discussion with the new investor (a large international firm) might have yielded agreement on the terms of the re-capitalisation, and prevented the present denouement. Several questions crop up as a consequence: whether the problem was allowed to fester for too long, whether the wrong signals were sent out halfway through, whether alternative solutions were summarily rejected, and whether last weekend’s actions were unnecessary and avoidable.

Reports now speak of problems dating back to the bank’s birth, since the promoter had apparently tied up equity infusion into the bank by assuring a minimum share price to financiers. Should a banking licence have been given in such circumstances? The share price commitment seems to have eventually led the bank into a cozy relationship with Ketan Parekh, so that it got caught in the stock market scam.

This is also the time when reports appeared of price rigging in the bank’s shares prior to its merger with UTI Bank. The RBI, to be fair to it, took various measures, but if the bank’s net worth was wiped out two years ago, not enough seems to have been done at the time.

Indeed, though some reports have spoken of the RBI complaining to the Institute of Chartered Accountants of India with regard to the two GTB auditors who were changed, the ICAI itself seems to be unaware of any such complaints.

The GTB episode reflects poorly on private banks, which seem to go under at the rate of one every two years. While it is true that most of these have been the old, regional banks (Nedungadi, for instance), the record of the new banks created in the last decade is none too good. Centurion has needed re-capitalisation from new shareholders, Times Bank merged into HDFC, and now GTB has been swallowed up in the biggest exercise of its kind. The banking public’s faith in private banks will have been dented by this latest episode. The private banks that have done well are those where there was a financial parent (UTI, IDBI, HDFC) with an understanding of the whole sector.

It is not that public sector banks have not run into trouble. Uco and Indian Bank have needed major re-capitalisation; IDBI and UTI themselves have been in the headlines for the wrong reasons.

So this is not to question the merits of private sector banking per se, because everyone knows that it is competitive pressure that has forced the public sector banks to change their ways, trim their bloated work force, adopt modern technology and improve customer service. It is no wonder then that the better-run private banks have been growing faster than everyone else.

Nevertheless, the merits of encouraging the privatisation of the public sector banks (a subject of active debate) will now be viewed differently, if private banks have to be rescued by public sector entities, not once or twice but in a steady sequence over many years. Indeed, the RBI in its present dispensation is known to be against such expansion of the private sector’s role. The GTB episode will strengthen that view.