GTBs Merger With OBC Is Justified But...

Updated: Jul 29 2004, 06:45am hrs
The Reserve Bank of India has imposed a three-month moratorium on the operations of Global Trust Bank (GTB) to protect depositors interest. The Delhi-based Oriental Bank of Commerce (OBC) has agreed to amalgamate GTB with itself. That settles the issue for the time being but raises issues of moral hazard and managements accountability to shareholders and depositors.

The real question is: must a strong public sector bank always take up the tab of rescuing a weak private sector bank, as had happened in the case of Punjab National Bank that took over Nedungadi Bank

The answer depends on the structure of banking and the state of economy, besides issues relating to transparency in governance and accountability to stakeholders, depositors and employees.

Oriental Bank has very strong fundamentals. As on March 31, 2004, it had deposits at Rs 35,674 crore, advances Rs 19,681 crore, total assets Rs 41,701 crore, gross non-performing assets (NPAs) Rs 1,211 crore and net NPAs nil. Its total income was Rs 4,022 crore and operating profit Rs 1,533 crore. It made a net profit of Rs 686 crore.

Oriental Banks investments to deposit ratio works at 47.08 per cent and spread to assets at 3.55 per cent. Its business per employee at Rs 4.16 crore and profit per employee at Rs 5.10 lakh are impressive. These figures would show that the amalgamation would not dent OBCs operational efficiency in the future. In fact it can consolidate its presence in the south and west by leveraging on the GTBs branch network and excellent service synergies.

It is clear that GTB has violated norms of the Banking Regulation Act, especially in the area of asset qualification. The proviso that states, an asset is an asset, whether performing or non-performing, unless otherwise written off... has been overstretched by many banks, including GTB, to convince their auditors on the measure of provisioning.

BD Narang, chairman and managing director of Oriental Bank, is hopeful of recovery of 40 per cent of assets. In that case, OBCs financials may not strain much. So amalgamation is justified, albeit with a caveat.

Depositors and employees may heave a sigh of relief at the rescue operation but shareholders of OBC may feel let down as after amalgamation their funds will be appropriated to the GTB losses.

Another important issue concerns different working cultures of two banks. OBC and GTB are so different that it would be a challenge to channelise cultural synergies to attain objectives of growth and optimal asset utilisation.

The writer is a Mumbai-based banking consultant