Indian private sector lender Yes Bank Ltd's shares tumbled nearly a third on Friday, wiping as much as $3.1 billion off its market value, after the central bank reduced charismatic CEO Rana Kapoor's term, creating uncertainty about its outlook.
The Reserve Bank of India (RBI) said late on Wednesday Kapoor can serve as the lender's chief executive only till Jan 31 next year, after shareholders voted in June to extend his term for three years, pending its approval.
Though the central bank did not give a reason for its decision, the move, according to market insiders, exemplifies the RBI's increasingly assertive approach in tackling the bad debt problem plaguing India's banking sector.
Kapoor, one of India's most prominent bankers, co-founded Yes Bank in 2003 and has been instrumental in its rise to become the fifth-largest private sector bank with assets of $43.2 billion. But the rapid expansion came at a cost.
Yes Bank's bad loans spiked in October last year after a risk-based supervision exercise by the central bank forced the lender to account for 63.55 billion rupees ($881.1 million) more in the non-performing category. Kapoor had termed it a "temporary setback" and said remedial steps were underway.
Indian banks have seen a surge in soured loans that hit a record $150 billion at the end of March and stricter rules enforced by the central bank are expected to have pushed the industry's non-performing loans even higher.
Earlier this year, RBI chief Urjit Patel said the central bank had limited authority over state-run banks that account for the bulk of bad loans in the sector, and called for reforms to give the regulator more powers to police such lenders.
Those comments were refuted and criticised by government officials who, according to media reports, said monitoring the management of lenders was RBI's job.
Since then, Axis Bank, riddled with bad loans, said its long-time Chief Executive Shikha Sharma would step down, days after the central bank was reported to have expressed concerns about the lender giving her a three-year extension.
ICICI Bank also named group veteran Sandeep Bakhshi as its interim head, and said CEO Chanda Kochhar would go on leave pending the completion of a probe into conflict of interest allegations.
"The RBI seems to be trying to put its foot down and establish an image of being an independent entity with the latest decision on Kapoor," a Mumbai-based fund manager told Reuters.
"But the RBI needs to be careful of collateral damage. While one cannot absolve the sins of lending at banks, the RBI should be able to communicate such big decisions in a slower and more efficient manner," he said.
Yes Bank and RBI did not immediately respond to requests for comment.
Indian stock markets were closed on Thursday for a holiday.
Yes Bank shares sank to a low of 218.10 rupees. Before Friday's trading, Yes Bank had a market value of about $10 billion.
At least two brokerages downgraded the stock, citing uncertainty and doubts in investors' minds about the bank's future.
Nomura analysts said a need to raise growth capital in troubled times, investor doubts about asset quality and the RBI's concerns for Kapoor continuing in his position could weigh on the stock.
The research firm downgraded the stock to "neutral" from "buy", reducing its target price to 345 rupees.
Yes Bank said its board will meet on Sept. 25 to decide on a course of action.
Some analysts said even though Kapoor won't be CEO from February next year, his influence on the bank will not disappear. He owned a direct 4.3 percent equity stake in the bank, as of end-June.
"Kapoor is a promoter and he will be there to guide the new management," said AK Prabhakar, head of research at IDBI Capital.