State Bank of India said on Saturday it would need to invest up to 24.5 billion rupees ($331 million) to buy a 49% stake in YES Bank Ltd as part of the initial phase of a rescue deal for the troubled lender.
"We are the largest bank in the country and we have a role to play," SBI Chairman Rajnish Kumar said, adding that India's largest state-run lender had been asked by the government to stand behind YES Bank.
"Any restructuring plan will now become more credible both with the depositors as well as the potential investors," he told media, saying the survival of India's fifth-largest private bank as "a must".
YES Bank, weighed down by an increasing pile of bad debt, has struggled for months to raise the capital it needs to stay above regulatory requirements, without any success.
On Thursday, the Reserve Bank of India (RBI) took control of YES Bank, imposed limits on withdrawals to protect investors and said it would work on a revival plan. The move led to a 56% fall in YES Bank's share price on Friday and spooked depositors, who rushed to withdraw funds from the bank.
Analysts said the moves to bring in SBI to stabilise things was a good first step but more funds would be needed to bail out the lender.
In a client note, Macquarie Capital analyst Suresh Ganapathy estimated that YES Bank could need as much as $3 billion of new funding in the next 12 to 18 months.
"So the question arises, would SBI bring in more capital in the future if required?" said Ganapathy.
Analysts also noted speed was crucial at this stage.
"An immediate equity infusion will be critical to prevent any significant damage to the business," said Acuite Ratings & Research, in a note.
SBI said it would try to implement reconstruction of YES Bank much before the end of a 30-day moratorium imposed by the central bank. It also said it was in talks with others keen to invest in the troubled bank.
Kumar also acknowledged SBI's investment in YES Bank could increase to as much as 100 billion rupees ($1.35 billion) over time, depending on the lender's capital requirements.
The rescue plan states SBI will not be allowed to reduce its stake to below 26% for at least three years.
"Now that SBI's there for at least for three years, there's a possibility that now you might get some serious players coming to invest," said Siddharth Purohit, a research analyst at SMC Institutional Equities.
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