BOMBAY, 27 July 2004 — India moved yesterday to save what was left of Global Trust Bank Ltd. by merging it into a state-run bank, two days after freezing most operations at the private bank and sparking a rush to withdraw money.
Global Trust, a 10-year-old bank with close to a million customers at 104 branches, will be taken over by Oriental Bank of Commerce, a New Delhi bank with 1,000 branches and 410 billion rupees ($8.8 billion) in assets, the central bank said.
Shares in Global Trust, which is suffering losses due to some large bad loans it made a few years ago, plunged by the daily limit of 20 percent yesterday. Shares of Oriental, with 8 million customers, initially fell 6 percent but ended up 1.7 percent as it became clear that it would not issue any new shares to complete the deal.
The government had placed Global Trust, with 69.6 billion rupees in assets as of March 2003, under a three-month moratorium from Saturday after it failed to come up with a restructuring plan acceptable to the central bank, the Reserve Bank of India (RBI).
The government ordered the bank not to give new loans without central bank permission, allowing it only to make payments for day-to-day operations or on obligations incurred before the moratorium. Depositors can only withdraw up to 10,000 rupees ($216) each.
“What is 10,000 rupees for three months? It will be very difficult,” said Parul Karachiwala, a 49-year-old businesswoman, who had hundreds of thousands of rupees deposited in the bank.
The moratorium may be lifted before the end of the three-month period but will definitely stay in force until Aug. 7, RBI Executive Director Usha Thorat told reporters. Shareholders and the public have until that date to comment on the merger proposal, she added.
“The moratorium was imposed in the depositors’ interests and the public interest,” she said. “Depositors should be reassured that in the case of all the private sector banks the RBI has a very close system of supervision and regulation.”
Depositors may withdraw more with RBI approval for emergencies, such as medical and education costs. There is no limit on such withdrawals, but in past moratorium cases the RBI allowed up to 100,000 rupees to be taken out, Thorat said.
Traders said Oriental shares rose because the takeover would involve no equity expansion and because Global Trust’s capital and reserves would be adjusted against its losses.
Oriental gets the customers of Global Trust, which is based in the southern Indian city of Secunderabad, and its branches, many of which are in the south where the state-run bank has a limited presence. The two banks also share a common technology platform.
“We are getting a strong retail base with almost a million customers,” Oriental Chairman and Managing Director B.D. Narang told Reuters, adding that the due diligence process would start immediately after the expiry of the Aug. 7 deadline.
“Due diligence should take six weeks after that, but we are trying to compress it to four weeks. After that, it is a question of getting RBI approval for our proposal’s terms,” Narang said.
Oriental Bank has had no net non-performing assets since September 2003.
The RBI has given no details on Global Trust losses, but said on Saturday its net worth and capital adequacy were negative.
Set up in 1994, Global Trust is one of a new breed of private banks created after India opened up its financial sector a decade ago. The bank had deposits of 62.25 billion rupees as of the end of December 2003, according to its Website, just 0.4 percent of the country’s total bank deposits of some 15.7 trillion rupees.
Global Trust had proposed an equity infusion from an overseas investor, but the RBI did not want foreign equity in the bank.
“Therefore, the next stage was clearly a compulsory amalgamation,” Thorat said.
Depositors queued up outside Global Trust branches yesterday, some standing in heavy rain in the financial hub of Bombay, to pull out some money.
Dinshaw Bhathena, a 67-year-old who started queuing early yesterday morning, was worried about having enough money for his daughter’s wedding.
“All her earnings are in this bank. There has been no saving in any other bank,” he said. “I feel helpless; I don’t know what to do.”