Sucheta Dalal :The accounts that brought down GTB
Sucheta Dalal

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The accounts that brought down GTB  

Aug 9, 2004


Last week, we talked about how the Reserve Bank of India (RBI) clearly knew how bad things were at Global Trust Bank (GTB) as far back as 1999-2000. Let’s now look at how the annual inspection report of the Department of Supervision (DOS) had touched on every single issue that contributed to its doom. Why then was GTB allowed to spin out of control? Our documents show that it was because senior officials of the RBI’s Hyderabad office (many had children working in GTB) worked hard to tone down words like ‘ever-greening’ or ‘‘NPA investments’’ to help suppress bad loans.


Many dubious cases, including loans to Ketan Parekh, Shankar Sharma’s First Global, and those to diamond traders, were specifically discussed by relegation to the annexure. Although the inspection was completed in September 2000, the report was released only in January 2001, because RBI’s officials wanted to help GTB bag an insurance licence. It almost got it too, except that Scam 2000 also crashed GTB’s high-flying reputation.


Here are some issues flagged in the inspection. First, it drew attention to ‘serious irregularities’ in the accounts of 18 firms of the Ramesh Gelli group, and specifically ‘‘suspected money laundering’’. The DOS had concurred with the seriousness of doubts raised and referred it to the central office for action. There is no evidence of corrective action.


Instead, as Sridhar Subashri, GTB’s former executive director recently wrote to a newspaper, ‘‘any one in the banking sector would be aware’’ that even after Gelli stepped down from GTB in 2001 ‘‘he continued to guide decisions of the bank through his sister, Parimala Anand’’ (a director) and his son Girish Gelli who became a director in November 2003.


They were connected with many of the 18 companies mentioned above. Bankers insist that even Sudhakar Gandhe, who took over as GTB’s Executive Director was close to Gelli.


Yet, RBI benignly swallowed Gelli’s fiction of having distanced himself from the bank. While Gandhe tells the media that he ensured massive loan recoveries, the bad loans are estimated at a huge Rs 1,500 crore and could be as high as Rs 2,500 crore according to banking sources. GTB tried to engineer a quick merger with UTI Bank to bury the problem but failed to push it through.


One of the first danger signals should have been the infamous preferential allotment of 148 lakh shares worth Rs 125.80 crore in 2000. The shares were allotted to mixed bunch of entities. On one hand there were four institutions — IFC Washington, Sun F&C, Kotak Mahindra Finance and Prudential ICICI Trust. The others included the infamous Nishkalp Investments, which brought down Tata Finance.


Nishkalp, which turned out to have extremely close connections with a crony of Ketan Parekh was the single biggest investor with a Rs 50 crore allotment. Interestingly, it also had an overdraft facility of exactly Rs 50 crore from GTB, which was also rolled over several times. Did this over-draft finance the subscription? What was the relationship with Nishkalp? Instead of investigating this, RBI supervisors wanted the inspection report to delete specific names and replace them with generic references.


Other big allottees were Ketan Parekh entities Nakshatra Software and Chitrakut Computers. Three others, Palm Print Textiles, AMA Real Estate and M.F. Properties, were unknown Ghaziabad-based companies.


The last two owned 1.2 and 1.4 per cent respectively of GTB’s equity until 2003. Interestingly, on December 22, 2000, former chairman Ramesh Gelli, in reply to a query, had explained with a flowchart how Chitrakut and Nakshatra had funded their purchase of preferential shares. Both were funded through money from Madhavpura Cooperative Bank and Bank of India among others.


If the RBI central office were more alert in its supervision, it would have questioned the two banks (as in the 1992 scam) nd discovered Ketan Parekh’s crooked nexus well before the bubble burst.


RBI’s Hyderabad office had unearthed clear evidence of ‘self dealing’ in the bank’s shares by the promoter group, through a pattern on clean short-term clean loans to a range of brokers. This too was never investigated.


Consequently, when the bank was placed under moratorium on July 24, Ketan Parekh’s outstanding dues to the bank were estimated at nearly Rs 240 crore, without including bad loans to crony industrialists.


Two sets of industry groups were flagged by the inspection for their special relationship with GTB in 2000. One was the problem exposure of Rs 150 crore to several Balaji group companies such as Balaji Distilleries, Balaji Hotels, Balaji Industrial Corporation, Jayaswal Neco, and a further loan of Rs 46 crore to Pearl Distilleries (60 per cent owned by the Balaji group).


GTB allowed these companies to recklessly run up bad loans, divert funds within the group to pay off creditors and it even subscribed to their Preference Shares and Non Convertible Debentures, in order to help ‘evergreen’ the loan accounts.


A single account called Petro Energy Products Company India (PEPCO) is worth a mention. In 1999-2000, GTB wrote off a hefty Rs 82 crore as bad loans. Of this, exactly half (Rs 41.23 crore) was on account of PEPCO. The company was allowed to remit money abroad for a second-hand refinery, although the land for the project was not acquired. Also, the technology was obsolete and the project feasibility doubtful.


The RBI inspector noted that the beneficiary of the remittances abroad needed to be investigated, because the bank had hurriedly written off the money without making any serious effort to recover its dues. The inspection report listed 10 other companies where GTB had written off loans within a year, without serious recovery efforts. Banking sources say that many of these loans smack of political funding.


It was never investigated. Another large term loan flagged by the report was to diamond merchant Bharat Shah’s company Rhiday Real Estate (Rs 43 crore) to finance a Rs 72.49 crore commercial complex in Mumbai (Trambak Court). The bank flouted all prudential guidelines to lend money to the rich Mr. Shah and the loan had already turned bad by 2000. It had a huge exposure to Bharat Shah’s companies such as Beautiful Diamonds (Rs 46 crore default), B. Vijay Kumar & Co (Rs 131 crore exposure in 2000) and crystal Gems, while the security cover on these loans was abysmal.


Many of these loans had turned bad even then. Clearly, GTB was killed by the crooked lending of its own management and a regulator who deliberately ignored jangling alarm bells until it was too late.


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-- Sucheta Dalal