Seizure of Yes Bank sends shockwaves

India's attempt to buttress its financial system by taking control of the country's fourth-largest private lender has instead triggered widespread confusion and signs of investor panic, adding a fresh layer of risk to an economy that's already headed for its weakest expansion in more than a decade.

The seizure of Yes Bank Ltd by the central bank late Thursday was the country's biggest such intervention in at least 13 years.

Speculation of a government rescue had been swirling for months, but the announcement unnerved markets by leaving several key questions unanswered, including the fate of depositors, creditors and shareholders.

Also unclear was how Yes Bank clients and counterparties would cope with government-imposed caps on individual withdrawals and a 30-day moratorium on new loans and payments.

A Walmart Inc-backed Indian payments service that relies on Yes Bank to process transactions for more than 175 million users went down late Thursday, underscoring the far-reaching consequences of halting major portions of the bank's operations.

Investors responded by dumping Yes Bank's bonds and shares as well as those of other smaller lenders.

State Bank of India, which has been tapped to inject new capital into Yes Bank, suffered its biggest intraday tumble since 2012. India's benchmark Sensex index plunged as much as 3.8%, one of the biggest declines in Asia, and the rupee weakened toward a record low.

Lines to withdraw money at one of Yes Bank's branches in Mumbai were larger than usual around midday yesterday, with security officers telling customers they would have to wait one and a half hours to get cash after ATMs ran out of bills.

"The market was expecting a solution," said Nilesh Shah, chief executive officer of Kotak Mahindra Asset Management Co. "People are bound to react the way they have this morning, but the panic can easily be controlled if the government announces the contours of the revival plan."

The flight from Indian assets persisted even after Reserve Bank of India governor Shaktikanta Das said the nation's banking system was "sound" and a proposed resolution plan for Yes Bank would be released quickly.

The RBI, smarting from the failure of a small lender last year, took the decision to seize Yes Bank after noticing a surge in withdrawals by depositors, people with knowledge of the matter said.

Policymakers were concerned that the outflows would accelerate once the bank releases its earnings on March 14, which could show a jump in bad loans, the people said.

Many users shared their worries about possibly losing their deposits, even after Finance Minister Nirmala Sitharaman told reporters yesterday that the money was safe.

The RBI has placed a 50,000 rupee ($679) limit on individual withdrawals from Yes Bank accounts.

"I have about 150,000 rupees in savings here," said Amit Shinde, a 28-year-old construction contractor, as he waited in line to take out cash. "I will be withdrawing it as soon as its possible. I don't have confidence in the institution any more."