Liberalization of the financial markets in the early 1990s allowed private banks to enter the sector. This move was welcomed with much gusto and fanfare opening new doors for the country’s financial sector. Liberalization has reduced restrictions on banking; has strengthened and tightened the prudential norms and convergence with international standards has improved the performance of the banking sector. But now two private banks going down in last two years has raised concerns over the sector’s health and the regulator’s role. One of the main functions of the Reserve Bank of India (RBI) is to act as a, ‘regulator and supervisor of the financial system.’ It prescribes broad parameters of banking operations within which the country’s banking and financial system functions, with an objective to maintain public confidence in the system, protect depositors’ interest and provide cost-effective banking services to the public. However, the objective of maintaining public confidence in the system has received a blow with the recent Global Trust
Bank (GTB) crisis.
On July 24, 2004, RBI issued a 3-month moratorium on GTB. The bank has been facing problems like share price rigging, high exposure to capital markets, connected lending, etc. since 2001. It also had huge Non-Performing Assets (NPAs) and failed to get additional capital. High capital market exposure without adequate attention to the quality and concentration of assets was the cause of large NPAs that resulted in the bank’s downfall. With the general public not being aware of the bank’s problems, RBI’s sudden decision to impose a 3-month moratorium to freeze all GTB accounts came as a shock. Their trust in the apex bank to safeguard depositors’ interest failed. An RBI official, on condition of anonymity, clarified that the decision was not at all sudden, as it appears to be to the general public. “The decision was not sudden. All options were first given to GTB. It did not succeed in giving any offer to infuse fresh capital except one. Terms and conditions of that offer were not acceptable from the regulatory viewpoint. The moment GTB’s proposal was rejected, immediate action was necessary to avoid adverse consequences to the depositors and the system. Hence, the moratorium was issued.” Prof. Debajyoti Ghosh Roy of BDP Consultants also confirms, “….To the outside world it may appear as sudden, but in fact it is not so. RBI has been taking a series of measures— one after the other (which are not generally publicized) and the public is not aware of them. There have been several precedences like this. The merger of the Nedungadi Bank with Punjab National Bank is a case in point.”

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