Yes Bank's head office in Mumbai, India. Photo: Himanshu Bhatt/NurPhoto

Shares in India’s Yes Bank plunged more than 70% on Friday after the central bank seized control and imposed withdrawal limits to prevent the collapse of the country’s fourth-largest lender.

Queues formed outside Yes Bank branches after the announcement late Thursday that customers could only withdraw 50,000 rupees ($678) over the next 30 days while the Reserve Bank of India (RBI) attempts to put together a rescue plan.

India has been reeling from a liquidity crunch caused by the near-collapse more than a year ago of IL&FS, one of the nation’s biggest shadow banks, responsible for significant consumer lending.

A resulting reluctance of banks to lend money has exacerbated the woes of Asia’s third-biggest economy, with growth slowing for seven consecutive quarters before picking up with a meagre 4.7% expansion in the final three months of 2019.

Yes Bank’s exposure to the beleaguered shadow banking sector is particularly large and it has been struggling for some time to raise fresh capital to free itself of a mountain of bad loans in order to quell worries about its viability.

Its weakened position was “largely due to the inability of the bank to raise capital to address potential loan losses and resultant downgrades”, the RBI said Thursday.

“The bank has also experienced serious governance issues and practices in recent years, which have led to a steady decline of the bank,” it added, but said there was “no need to panic.”

However, customers waiting to get their money were far from reassured.

“It’s not clear at the moment, and that is making some people panic a bit. Even I am at the moment,” Devika, a student and Yes Bank account holder, told AFP as she queued to withdraw money in New Delhi.

“I had purchased 15 shares of Yes Bank at 150 rupees per share and now they are at 15 rupees. It’s a huge dent on my investments and even my deposits are locked in,” Varsha Gandhi, a Mumbai-based lawyer told AFP.

“I am just waiting to see if RBI’s moves will have any positive impact. But it’s a huge loss as the stocks have tanked,” 27-year-old Gandhi added. 

RBI governor Shaktikanta Das also tried to reassure account holders on Friday.

“The 30 days which we have given is the outer limit, you will see very swift action from the RBI to put in place a scheme to revive Yes Bank,” he told reporters in the financial capital Mumbai. 

According to media reports, the RBI was attempting to cobble together a rescue that included State Bank of India (SBI), the country’s largest lender, and other financial institutions.

By early afternoon in Mumbai, Yes Bank shares had recovered slightly but were still down 59% at 15.20 rupees.

Shares in other Indian financial stocks were also down sharply, with IndusInd Bank off 8.3% and Bajaj Finance losing almost 5%.

The government effected a moratorium on Yes Bank from March 5 to April 3 as recommended by the Reserve Bank of India. During this period the bank will not allow customers to withdraw more than 50,000 rupees, irrespective of the number of accounts they may hold with the bank. The central bank has superseded the board of Yes Bank with immediate effect and has appointed former State Bank of India chief financial officer Prashant Kumar as its administrator.

The Reserve Bank has said this was being done in an attempt to restore depositors’ confidence in the private lender and will put in place a scheme for its reconstruction or amalgamation. It said that the restriction on withdrawals could be waived in cases of unforeseen circumstances, such as medical treatment of depositors or their dependents. It also said that Yes Bank customers can withdraw more than 50,000 rupees towards the cost of higher education for the depositor or any person actually dependent on him in India or abroad.

Earlier reports indicated that the country’s largest bank, the State Bank of India, along with some other financial institutions, plan to bail out the capital-starved private lender. It was reported that a consortium led by the State Bank of India may appoint a new managing director and get board control at the bank.

Yes Bank has been saddled with high levels of bad loans due to its exposure to troubled sectors and stressed assets such as Jet Airways, IL&FS, CG Power, Café Coffee Day and Cox & Kings. It has been trying to raise US$2 billion in fresh capital for two quarters.

The bank also landed in trouble when it faced strictures from the Reserve Bank of India over the understatement of bad loans for two consecutive years. The central bank gave marching orders to founder and chairman Rana Kapoor, who stepped down last January. He was succeeded by Ravneet Gill.

Also Read: RBI restricts Yes Bank chief’s tenure

Founded in 2004 by Rana Kapoor and his brother-in-law Ashok Kapur, Yes Bank managed to grow its corporate and retail loan book aggressively. However, in 2008 Ashok Kapur died during the “26/11” terrorist attack that rocked Mumbai.

Rana Kapoor then took full control of the bank, but the going was never smooth. He had numerous run-ins with Ashok Kapur’s wife and daughter, who were co-owners, that ended up before the courts.