BOMBAY, 2 August 2004 — Trust is like fine porcelain, once broken, even if glued back together, the cracks remain forever. This truth about trust is true for all relationships, be it between husband and wife, between friends, mother and child, and even between a corporation and its shareholders or investors.

Somehow in the Indian corporate world, the word “trust” has been like a jinx. More then imbibing trust, it has always managed to break it. First it was Unit Trust of India and now, it is Global Trust Bank (GTB).

Nationalization paved way to privatization in the India banking sector and GTB was among, ironically, the first big private sector bank which saw huge number of depositors. Now the failure of GTB which has affected as many as 800,000 customers, has made the same depositors take a relook at this entire gamut of privatization and look once again at the public sector banks in a new, favorable light.

It’s just not the retail investors who have parked deposits with GTB. Even domestic mutual funds, mainly UTI Mutual and administrator of the specified undertaking of the UTI, which manages assured monthly income plans, MIPs, have invested close to Rs.450 million in bonds issued by the private bank. However, since the government has taken over the assured return schemes, unitholders need not panic.

The Reserve Bank of India has announced that the financially troubled private bank would be merged with state-run Oriental Bank of Commerce (OBC) which is one of the best in the business with a large capital base and zero NPAs.

The problem over the GTB was solved speedily with OBC coming to the rescue but it does open a Pandora’s box. One cannot help but wonder why RBI waited so long though it knew about the skeletons in GTB’s closet as the Gelli-KP connection was unearthed way back in 2001. It was known to the RBI that the bank was misleading investors and depositors by overstating net worth, profits and understating its NPAs. Now by placing the bank under a 3-month moratorium, it has created a liquidity crisis for the GTB depositors.

There are the cynics who say that the GTB shareholders deserve the harsh treatment given the tainted history of Ramesh Gelli, the founder of the bank. It may be recalled that the RBI indicted Gelli in 2001 for being in cahoots with erstwhile Big Bull Ketan Parekh in the stock market scam. Gelli was later removed as the chairman of GTB.

Gelli, who headed GTB refuses to take the blame for bank’s failure but holds his management style of total delegation of power to senior mangers and his hands-off approach responsible for the bank’s collapse.

What really caused the downslide of GTB was its exposure to the capital market in 2000-01. It had given loans of close to Rs.8.50 billion in 2000-01, which mostly were routed to the capital market. Of these loans, GTB recovered only around Rs.2.00 billion. Apart from the capital market, GTB also made some bad loans to the Balaji group, Pentafour group, Lloyds group, LKP group of companies, Beautiful Diamonds, Geekay Exim, Shirpur Gold Refinery etc. The outstandings from these loans alone account for around Rs.9.30 billion.

There is now concern that this unfortunate incidence with GTB would erode the customer confidence about the other private sector banks too. Analysts say that this could happen in the short term but reassured that it unlikely that any other private sector bank will succumb to credit weakness. The balance sheets of most private banks are already published, and most are okay. For GTB, the signals were visible since last year.

Bankers say that it is not important who owns the bank as even depositors of the public sector New Bank of India were in trouble after it failed in 1995 and was placed under moratorium, before eventually being merged with PNB.

The only foolproof method to safeguard one’s interest was to keep watch on performance. It would be best for customers to have a look at the statutory disclosures made by banks which are published annually by banks in a newspaper. One can also check the bank’s financial health by checking out their viability on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) websites.

Bankers say that be it private sector or public sector, it is important to park your funds only in banks which make profits. The day it shows losses, it is prudent to move it out to other safer banks.

Non-performing assets are also an important indicator. Known as NPA in banking colloquial, it signifies the size of bad loans of a bank. Lower the NPAs, the better the bank is. It is best if it is less than 3 percent of total loans given by the bank.

One should always pay attention to the capital adequacy ratio (CAR). It shows the strength of a bank. Higher the CAR, better is the bank. If CAR is over 11 percent of total deposits, it can be considered a strong bank.

The banking sector can grow only if there is capital and strong institutional support. Individual promoters and corporate-backed promoters are more risk prone. Bankers say that it is no longer a question of the public sector versus the private sector. The success of nay bank, from any sector, would henceforth be determined based on the systemic checks, clean balance sheets, deep pockets backed by strong institutional support.

The fall of GTB has been a wake-up call for the Indian banking sector and now that the alarms are ringing loud and clear, hopefully, good banking sense will prevail.