The board of India' top lender, State Bank of India, agreed on Thursday to conduct a viability assessment into buying a stake in troubled private sector Yes Bank, a source said.
Yes Bank shares surged more than 25 per cent after reports emerged that a group led by SBI will inject capital into the bank.
"The board has recommended to undertake a viability study before taking a decision on Yes Bank," the source, who attended the board meeting, told Reuters.
SBI had been authorised to pick other members of the consortium in the plan approved by the government, Bloomberg reported, citing people with knowledge of the matter.
Two senior finance ministry officials, directly involved in the matter said, "the commercial decision would be taken by the SBI board," and different options were on the table. "We have not so far received the proposal from the SBI," one of the finance ministry officials, who declined to be named as the discussions were private, told reporters.
SBI shares fell as much as 5.4 per cent on the report, before reversing course to close 1 per cent higher.
After the capital infusion, it is likely that the current management, including the Managing Director & CEO Ravneet Gill, may also be replaced, sources told Reuters.
Mr Gill and Yes Bank did not immediately respond to an email seeking comment.
Yes Bank said in a filing with the stock exchanges that it was not aware of any such decision, while SBI said it would abide by timelines for disclosures.
The Finance Ministry did not immediately respond to a Reuters request for comment.
"The cost of not bailing out Yes Bank for the economy and banking system is far higher than bailing out and hence under the current circumstances this looks to be the only option as investor interest in the stock is very low," Macquarie Research said in a note.
Yes Bank has struggled to raise capital it needs to stay above regulatory requirements as it battles high levels of bad loans.
India's fifth-largest private sector lender has been trying to raise $2 billion in fresh capital since late last year, and in February delayed its December-quarter results.
"The more the delay in capital raising, more is the systemic risk engendered by Yes Bank's failure," Macquarie said.
In January, the bank said it had rejected a $1.2 billion investment offer from Canadian investor Erwin Singh Braich and Hong Kong-based SPGP Holdings - an offer about which many analysts had expressed doubt.