Indian shares fell 1% on Tuesday, as investors fretted about the exposure of major banks to the troubled real estate sector, compounding worries about a slowdown in economic growth.
Markets opened higher but see-sawed before turning firmly lower. The broader NSE Nifty settled down 1% at 11,359.90 after hitting a two-month intraday low earlier. The benchmark BSE Sensex ended 0.94% lower at 38,305.41.
Realty and banking stocks were the top losers, with the Nifty real estate index ending 4% lower while the Nifty private banks index shed 1.4%.
Analysts said a deepening crisis at Punjab and Maharashtra Co-operative Bank (PMC), one of the country's top such lenders, and fraud allegations against mortgage lender Indiabulls Housing Finance Ltd were hurting market sentiment.
"Wherever exposure is being seen in the real estate sector and related companies, that's where the market is seeing a lot of selling," said Kunj Bansal, chief investment officer at Acepro Advisors in Mumbai.
Indian officials on Monday filed a police complaint against PMC's senior management for hiding soured loans, in a case that has sparked renewed concerns about the health of the troubled banking sector, which is facing a mountain of bad debt.
Local media also reported that over two-thirds of PMC's assets comprised loans to bankrupt realty firm Housing Development and Infrastructure Ltd.
"It's very disturbing for the market that PMC has collapsed," said Saurabh Jain, assistant vice president at SMC Global Securities Ltd in New Delhi.
"If there are problems in the financial sector, how can consumption be restored to normal?"
A conference call by Indiabulls' management on Monday evening did little to reassure investors initially, with shares shedding 11.8% in intraday trade after a 34% plunge in the previous session. However, the stock recovered to end 4.6% higher.
RBL Bank Ltd fell 7.9%, IndusInd Bank shed 5.6% and Yes Bank plunged 22.2%, hitting a 10-year low and making it the top decliner on both the NSE and BSE indexes.
Yes Bank and IndusInd Bank said separately any exposure to Indiabulls was fully secured.
Growth in Asia's third-largest economy has slowed, with demand for everything from cars to cookies taking a hit, prompting the government to take measures to boost growth, including a widely cheered move last month to slash corporate taxes.
"The optimism that came after the corporate tax cut announcement may now crack to some extent," SMC's Jain said.
Meanwhile, Bharat Petroleum Corporation Ltd gained 4.9% after a government panel of secretaries on Monday proposed to privatise the oil refiner, according to two people familiar with the matter.