Trust betrayed: Customers queue up outside a GTB branch to withdraw their money from the troubled bank

Global Trust Bank (GTB), set up by the dynamic, diminutive and publicity-loving Ramesh Gelli, blazed a trail of triumph and tumult from the very beginning in 1994. Ten years later, even at the endgame of GTB's demise-as the Reserve Bank of India (RBI) amalgamated GTB with the public sector Oriental Bank of Commerce (OBC)-the cloud of controversy refuses to blow away.

On Dalal Street, GTB shares, quoting at Rs 2.5 each, are seeing huge trading volumes. The 58-year-old Gelli admits to selling 3.5 per cent of his 7.5 per cent stake in the last few days. But who's buying the shares of a bank that is awaiting cremation?

For those who missed the action, on July 24, 2004, the RBI declared a moratorium on GTB-which had non-performing assets (NPAs) of over Rs 1,100 crore-and two days later, announced a scheme for amalgamating it with OBC.

HOW THE BOOM CHANGED TO BUST

Lost magic: GTB's Ramesh Gelli The beginning in 1993: The promoters raised capital using an ingenious-if unconventional-strategy. Ramesh Gelli tapped the relationships he had cultivated with the diamond trade during his Vysya Bank days for GTB's IPO. Of the promoters' contribution to GTB, about Rs 30 crore is said to have come through this ingenious financial gameplan. 1994-97: GTB focuses on mid-market corporates, trader-exporters, and on the jewellery, garments, and housing and construction sectors. The bank sets a scorching pace of growth in the first two-to-three years, but faces a major problem in 1996-97 when the Indian economy slows down. 1997-98: GTB starts evergreening its accounts. Customers having trouble servicing past loans are sanctioned fresh advances to repay the earlier loans, to avoid having to classify them as NPAs. 1998: The central bank asks GTB to alter its loan sanction structure. The bank institutes the committee approach to loan sanctions. Gelli is the chairman of both the executive credit committee and the Committee of Board. The bank's functioning remains centralised. 1999-2000: GTB expands its capital market exposure, especially to Ketan Parekh. These funds are used by Parekh to build up huge positions and ramp up prices of several shares, including those of GTB. January 2001: GTB and UTI Bank announce plans to merge. February 2001: Gelli requests the RBI for credit of Rs 700 crore to tackle the bank's liquidity problems as there is a net outflow of Rs 950 crore of deposits from the end of February 2001. The central bank, however, sets certain conditions and directs GTB to bring down its exposure to capital markets. April 2001: Merger with UTI Bank called off. GTB's bottomline dips as the scam takes its toll on the stockmarkets. The RBI pulls up Gelli for serious irregularities and asks him to relinquish charge as the bank's CMD. June 2001: Gelli quits the board even as the JPC calls for probe into the stockmarket scam. October 2001: GTB appoints Ernst & Young to identify deficiences. March 2002: The annual report shows that GTB has a net worth of Rs 400 crore and net profit of Rs 40 crore. But an RBI inspection of March 2002 shows that the bank's net worth is negative. In a bid to show a semblance of a clean-up, GTB dismisses seven officials. September 2003: GTB's accounts for the year ending March 31, 2003, show its net worth to be marginally positive but RBI's inspection shows the net worth as eroded and capital adequacy ratio at zero. After the publication of the annual report 2002-03, the GTB board sacks PricewaterhouseCoopers as the auditors. November 2003: The RBI advises GTB to take steps to infuse fresh capital to restore its car to 9 per cent and indicate a time-bound programme to fulfill its commitments. February 2004: Gelli is back on the board of GTB but is forced to resign a month later. June 2004: The RBI rejects the proposal of the US-based Newbridge Capital to make a strategic investment in the troubled GTB. July 24, 2004: The RBI decides to place GTB under a moratorium for three months. July 26, 2004: The RBI announces amalgamation of GTB with Oriental Bank of Commerce (OBC).

Gelli had claimed way back in 1994 that he would make GTB the country's best bank. Ask Gelli about it and pat comes the reply: "What has failed me is the management experiment of being hands off." But others have a different story to tell. Says an ex-GTB executive: "Even after Gelli stepped down as CMD (Chairman and Managing Director) in April 2001, he continued to guide the bank's decisions. His sister Parimala Anand and his son Girish Gelli continued to be on the board."

So what killed GTB? Was it the cowboy style of its promoter-chairman? Was it an audit failure? Could the bank have been saved if the RBI had okayed the proposal of the US-based Newbridge Capital to inject fresh capital into it? Here's what we uncovered.

Aggressive Growth

From the beginning, GTB aggressively focussed on mid-market corporates, typically businesses having a turnover of Rs 25-250 crore in areas such as jewellery (diamonds in particular), garments and textiles, and exports. Most were relationships that Gelli had carried with him from Vysya Bank, where he had been CMD. The rationale: High risk but high return. This strategy served the bank well in the initial years and it set a scorching pace of growth. But in 1996-97, when the Indian economy slowed down and the East Asian crisis erupted, a number of these loans turned non-performing. To cover up, the management resorted to evergreening (giving fresh loans to repay earlier loans that had turned bad). The result: More bad loans. In the case of the Chennai-based Balaji Group alone, Rs 100 crore had to be finally written off due to evergreening.

This so-called "relationship banking" with clients who enjoyed good rapport with the top management was the beginning of the problem. Gelli, however, denies this, saying: "I never met clients." (See "I Haven't Failed As A Banker"). In 1998, the RBI asked GTB to broadbase its credit decision process. From then on, an executive credit committee and Committee of Board (cob) approved all major loan decisions. Gelli was chairman of both committees. A new structure was put in place, but as a banker puts it: "The centralisation continued."

In the hot seat: CEO Sudhakar Gande has the difficult of task of steering GTB through its proposed amalgamation with OBC

Come 1999, the stockmarkets started moving north. GTB immediately saw a growth opportunity and began courting Ketan Parekh, the so-called Big Bull of 2000. This proved to be the bank's nemesis. GTB advanced huge amounts to the likes of hfcl and Zee, who, in turn, routed this money to Parekh for rigging their stocks. Parekh also ramped up GTB stock prices using the bank's funds just before the announcement of its merger with UTI Bank (the marriage was called off in May 2001). When the market crashed, GTB's NPAs mounted and its net worth turned negative. RBI's financial inspection report in 2000-01 reveals in Para 5.3.1: "Perusal of board reviews/agenda papers revealed that during this period, the committee of the board under the chairmanship of CMD (Ramesh Gelli) had aggressively sanctioned ad hoc/one-time overdrafts/short-term loans to not only share and stock brokers, but also stockbroking companies." The scrutiny revealed that during December 2000 alone, about Rs 300 crore was outstanding against 19 broking companies.

GTB's association with KP's companies and subsequent JPC investigations into the scam are history. At the time of GTB's birth, there were questions asked about whether Gelli, the chairman of the scam-struck Vysya Bank (it was allegedly involved in the stockmarket scam of 1992), should have been allowed to float a new bank. Today, as others clean up the mess he created, Gelli's vaulting ambition is taking him into newer pastures. This time, it's a venture in training and education. Watch this space.

"I Haven't Failed As A Banker"

Ramesh Gelli, 58, former chairman of GTB and one-time poster boy of new-age private sector banking in India, didn't see the end coming. "I was taken by surprise," he says of the RBI's decision to announce a moratorium on the bank he co-founded in 1994. A week after the event, he spoke to Roshni Jayakar of BT on his delinquent baby. Mr Gelli, you started out in 1994 with the dream of turning GTB into the country's best bank. What went wrong? We had achieved that goal by 1998. We were ranked either Number 1 or Number 2 in most areas of our operations by various publications. By 1999, I felt my interest waning. Accordingly, I told the board that I wanted to be relieved of any active role in the bank. Sridhar Subasri was made the Executive Director. I thought I would be hands off and groom a whole new management team but the experiment failed. A year on, in 2000-01, our exposure to the capital markets increased dramatically. When the market collapsed in February-March 2001, the bank was badly hit. How could the bank build up such a huge exposure to the capital markets? We had 250 broker accounts and Ketan Parekh (KP), who had a relationship with GTB since 1996, was a big exposure-of around Rs 100 crore. But this was fully backed by securities. Internally, we targeted the capital markets as a great opportunity and decided to take a 20 per cent exposure to it. As we had a good system of risk management, it seemed a prudent decision. But when the market collapsed and GTB tried to sell out we found that some shares could not be sold. GTB was your baby. Why didn't you try to save it? We were considering merging with UTI Bank in the first quarter of 2001, and lots of things were happening simultaneously. The press was going to town about GTB's exposure to the capital markets. This led to the merger being called off, and there was a near run on the bank's deposits. The controversy snowballed and I had to quit. In any case, as the CMD, I was involved more with policy than with the operations of the bank. But you were known to be a hands-on banker. It is alleged that the credit decisions, which later became NPAs, had your blessings... No. I stopped meeting customers in 1998. The bank had a hierarchical decision-making structure: After passing through various committees of executives they would come up to the ed, well evaluated. I think there was a process failure and the short circuiting of certain procedures at the branch level. You again joined the board early this year... That was just to help the bank with a proposed domestic public issue. I resigned when I realised that the domestic issue was not an option. Have you failed as an entrepreneur banker, now that GTB has gone under? I would like to re-emphasise that I do not think I have failed as a banker or a technocrat.... And I have not lost my spirit of entrepreneurship. What next? Maybe something related to academics.

WAS THE WATCHDOG ASLEEP?

RBI Governor Y.V. Reddy Global trust bank (GTB) was badly hit by the 2000 stockmarket scam. The warning signals were flashing brightly for the last two-and-a-half years: Promoter-chairman Ramesh Gelli was asked to step down in September 2001, an interim Chief Executive R.S. Huggar quit after just eight months in the job, auditors were changed twice and the bank's accounting year was extended last year. Not surprisingly, several banks that came forward for GTB's hand backed out after conducting due diligence. But when, about six months ago, auditors issued a heavily qualified report and three directors resigned suddenly, the Reserve Bank of India-instead of taking action -gave the bank a clean chit. This, despite GTB's net worth being wiped out two years ago. Why did the central bank let the problem fester till July 2004? Was RBI finalising a white knight for GTB before announcing a moratorium? Or was it giving the bank management an opportunity to get its act right? Whatever the motivation, it can now claim that it was acting in good faith and get away with it. The amalgamation scheme of GTB with Oriental Bank of Commerce states that no suit or legal proceedings shall lie against the RBI, the transferee bank or the transferor bank for anything that is done or intended to be done in good faith in pursuance of the scheme. That's one hell of an escape clause!

THE POWER TWINS

Indian Bank's M. Gopalakrishnan Describe one and the other would fit the image like a glove. Both were high-flying bankers inebriated by the heady cocktail of money and power. M. Gopalakrishnan was Chairman of the Chennai-based Indian Bank from 1988 to 1995, while Ramesh Gelli was the promoter of the Secunderabad-headquartered Global Trust Bank (GTB) and its Chairman and Managing Director from 1994 to 2001. Coincidentally, both presided over their respective domains for seven years. When Indian Bank sank into the red in 1995-96 with a net loss of Rs 1,336 crore against a net profit of Rs 14.06 crore the previous fiscal, Gopalakrishnan was accused of giving advances to exporters close to the then DMK government in Tamil Nadu. Similarly, GTB managed to erode its net worth by giving loans to a cartel of stock brokers led by Ketan Parekh, who used the funds to rig the stock prices of a raft of companies, including those of the bank itself. Eight years on, Indian Bank is back in the black; it earned a net profit of Rs 405.75 crore in 2003-04. As for GTB, it has been amalgamated into the Oriental Bank of Commerce. But there' one crucial difference in the script for the two men. His political patrons (he was reportedly close to the late Tamil Manila Congress strongman G.K. Moopanar) couldn't save Gopalakrishnan from going to jail. But Gelli's proximity to the Telugu Desam Party ensured that he came out unscathed from GTB's troubles. At least till now.