The GSI Rescue Group has withdrawn from its attempt to recapitalise the non-bank financial institution Gippsland Secured Investments.A group of Gippsland business leaders had hoped to recapitalise the business and trade back to profitability.GSI had A$143 million in funds, primarily raised from debenture note-holders, when it was placed in receivership on September 3. The Trust Company, which appointed the receivers, said this was necessary to protect the note-holders from further erosion of their assets.The size and importance of the business in funding local businesses drew attention to the need for prudential regulation of this type of business."We wanted to give GSI the best possible chance of survival and believed it could continue to operate with a cash injection, a changed structure and improved management and governance," a spokesman for the Rescue Group, Duncan Johnston, said."The situation has not been helped by the regulator, which wants to increase the capital required to operate GSI and other small lenders, giving significant advantage to the major financial institutions," Johnston said.In response the Trust Company's group executive general manager for corporate client services, David Grbin, said: "We understand this will be a disappointing development for note-holders. "The receivership provided additional time and opportunity for the Rescue Group to develop its recapitalisation proposal. Unfortunately, a number of the key threshold issues were unable to be resolved," he saidIn a positive development for note-holders, the trustee and receivers advised that a second "meaningful interim distribution is expected to be paid to note-holders of GSI" in December 2013.A first interim distribution, of 15 cents in the dollar, was paid in early October.Any GSI note-holders experiencing additional hardship can make a claim for a partial early redemption of their investment. The GSI website has details about how to do this.