The government notified a moratorium on the operations of Global Trust Bank for three months following advice from Reserve Bank of India after the bank failed to come up with a viable proposal for raising additional capital.
In short, a moratorium will mean that the normal operations of the bank - taking deposits and giving out loans - will be halted till a solution can be found to rejuvenate the bank.
During the moratorium period, RBI will examine various options for protecting depositors' interests, which will include merger with a nationalised bank. This is the largest private bank to be placed under moratorium.
The 10-year-old GTB is also the first new generation private bank that has failed completely. In the past, all banks that have been placed under moratorium - such as, United Industrial Bank, Benaras Bank, Nedungadi Bank, Bank of Karad - have inevitably ended up being merged with a public sector bank (Allahabad Bank, State Bank of India , Punjab National Bank and Bank of India, respectively).
The bank's net worth (which is a sum of its share capital and general reserves) was wiped out two years ago under the weight of bad debts. These non-performing assets were the outcome of large, indiscriminate and dubious loans advanced to small companies - which include garment exporters, diamond traders and sharebrokers - in Mumbai and Hyderabad.
It was for this reason that promoter and former chairman Ramesh Gelli was pulled up by RBI and later sacked. A new management brought in after Gelli's ouster was given the mandate and time to get fresh capital.
The bank's time ran out last week after RBI found the only investment proposal, ostensibly from private equity investor Newbridge Capital, unacceptable due to certain conditionalities imposed by the fund.
Following the moratorium, depositors will be allowed to withdraw a maximum of Rs 10,000 from their savings or current account. The withdrawals can take place only through the branches since the ATM network of the bank have been disabled.
Speaking to newspersons, RBI executive director Usha Thorat said that moratorium could even end before the three-month period. in the interim, the three additional directors inducted by RBI on Saturday will take most decisions.
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