Larger messages from the Global Trust saga

THE FORCED merger of Global Trust Bank, a new generation private bank, with the public sector Oriental Bank of Commerce sends out several messages. At one level, there is a move towards consolidation in the banking industry, a perception driven home by the other significant development last week, the merger moves between IDBI Bank and IDBI. Even though the two developments occurred in rapid succession, as yet there is no concrete evidence to suggest that they are more than a mere coincidence.

However, both developments were waiting to happen, although in the case of GTB no one was sure as to which bank or group would be the saviour. Even the IDBI saga has been in the making for a long time and finding a `final solution' was long due.

Hence consolidation, though there will be (after all the legal and other formalities are complied with in both the cases), it would not be the outcome of some conscious policy decisions for the financial sector as a whole.

In fact the GTB saga underlines the point that even commonsense solutions need to be timed and sequenced properly. Was there a need to announce a moratorium (of the GTB) first, allow its depositors to fume and fret and then announce a merger with a strong public sector bank, the very next working day? Clearly both decisions would have been deliberated upon for a while. The management of OBC would have been sounded out (this was confirmed subsequently).

By restricting withdrawals by the GTB depositors in the first instance (July 24), the RBI merely created a panic, which of course was not the intended effect.

The proper course would have been to announce the merger simultaneously with the moratorium. Perhaps, the RBI will clarify in the days to come as to why that was not possible.

Fragile confidence

Talking of investor confidence, there has again been a major demonstration of how fragile it can be despite some strong initial support from the RBI. A little over two years ago, there was a run on GTB's ATMs at Hyderabad. Despite reassurances, including from the RBI, it took some time for normality to be restored. Attributing the run to `unsubstantiated rumours', the RBI had said, "It had not found anything that can cause apprehension either from a supervisory or solvency angle.'' It had categorically stated that both liquidity and solvency conditions of GTB were satisfactory and that it had no regulatory concern. The RBI did promise to make public its findings on the mini-run but did not do so.

The point is that so much seems to have changed over the past two years that the RBI has now moved to tackle the GTB problem in a comprehensive manner.

In contrast, in June 2002 its efforts were directed `at quashing rumours' to prevent systemic damage. Here again, the RBI would do well to explain as to what went so seriously wrong over the past two years to prompt such a drastic intervention. The problems of bad loans, shoddy bookkeeping and alleged collusion with the statutory auditors — the reasons cited — could not have happened overnight. It is the absence of a suitable explanation that has made this episode — certainly in its timing — intriguing.

Endangered category?

Does the demise of GTB signal the end of new generation private banking? Started with so much fanfare in the early 1990s with stringent capital adequacy standards (at least Rs.100 crores to begin with), a technology platform that even foreign banks did not have and above all a clean slate, these banks promised so much but have delivered so little.

Of the 11 entities incorporated so far (in two stages), very few have acquitted themselves creditably either in terms of operational parameters or stock market quotations.

The Times Bank had a short innings before being taken over by HDFC Bank.

The Centurion Bank, promoted by Dev Ahuja and a group of ex-Citibankers, went sick and had to be rescued recently by foreign capital and BankMuscat.

IndusInd Bank of the Hindujas has not really established itself while Bank of Punjab is languishing, with no visibility. In fact, it is only banks that have an impressive institutional pedigree that have blossomed.

The latest entrant to this category is Kotak Mahindra Bank. Its earlier incarnation as a leading NBFC will surely help as also the standing of their promoters.

But even after a decade and more of their functioning, no other inferences of the new private banks are possible.

Even in the category of institution-promoted banks, there are wide divergences in the performance and growth of the three successful ones — ICICI Bank, HDFC Bank and UTI Bank.IDBI Bank suffered from the legacy issues associated with its parent IDBI. There was also considerable confusion over its future. Even post-merger it is not clear what special roles will be assigned to the new entity.

One needs to wait for a while before pronouncing a verdict on new generation private banking.

C. R. L. Narasimhan

Recommended for you