The damage caused by Global Trust Bank's failure is unlikely to have a significant effect on the overall Indian banking system, even as depositors and creditors may face temporary problems, international rating agency Fitch said on Thursday.

The Global Trust Bank Crisis: Complete Coverage

"While GTBs failure may sour the market sentiment on some private banks in the short-term, it is unlikely to have a material impact on the health of Indian banking system," Fitch said in a release.

In fact, it said the financial condition of most Indian banks has considerably improved in 2-3 years and this is likely to be reflected in a slight improvement in their individual ratings in the coming months.

The decision to merge GTB with Oriental Bank is also consistent with the Reserve Bank's approach in about half a dozen such cases during the last ten years when a failed bank was merged with a larger government-owned bank, it said.

While the moratorium, which included bar on withdrawal of deposits beyond Rs 10,000, on the bank's operations for three months had been announced by government, based on RBI advice, the central bank announced a scheme for merging GTB with OBC in a swift move to mitigate the impact of this failure, Fitch said.

"Ultimately, the proposed merger of GTB with OBC should ensure that all GTB depositors and creditors are protected," it said.

Fitch said GTB's financial woes had been building up for the past two years after RBI's inspection of the bank's operations in 2002 revealed serious under-reporting of non-performing assets and loan loss provisions.