Shares of RBL Bank sank by 21.8 percent in trade on Tuesday and touched an all-time low of Rs 257.05. This is the stock's third consecutive session of losses. The stock has lost 40 percent of its value in 4 months falling from Rs 700-levels.

Banking stocks were bleeding in trade on Tuesday with Yes Bank leading the fall. Shares of Yes Bank fell by as much as 22.22 percent to Rs 29, its ten-year low.

Fresh bad loan stress

Banks and NBFC (non-banking finance companies) stocks are seeing a decline as investors look to reduce their exposure to these as more cases of financial irregularities in the sector and entities-they-lend-to have erupted in the recent past.

It appears as if this is the second wave of bad-loans-stress coming for banks, eroding their profit margins. Banks have reportedly lent Rs 6.4 trillion to NBFCs as of July end.

Indiabulls Housing Finance

The scepticism worsened after investigations began on Indiabulls Housing Finance Ltd to examine allegations of fraud and misappropriation. Last week, Lakshmi Vilas Bank Ltd, the entity that IBHFL has sought approval to be merged with, was put under PCA (prompt corrective action) framework by the RBI.

The position of mid-sized private banks like Yes Bank and RBL Bank remains weak as it is still unclear as to how much non-performing loans they will end up with as the second quarter ends and what kind of exposure they have to mid-sized corporates.

Low exposure to Indiabulls says RBL Bank

Following the sudden slump in share value, RBL Bank's CEO, Vishwavir Ahuja in an interview with CNBC-TV18 said that "some malicious speculations" that having been going around are not true and "nothing has materially changed from 3 months ago and the bank continues to be in good shape."

As for its exposure to Indiabulls, Ahuja said that it was very little. "It is approximately 0.25 percent or 0.3 percent. A significant portion of that is to the housing finance company (HFC), which is almost 125 percent covered by cash sitting in my bank, which I can adjust in two hours with permission of the company. My entire exposure to HFCs and NBFCs is among the lowest in the industry. I again clarify, there is absolutely no concern as far as this aspect is concerned," he said.

The bad loan problem in NBFCs and Shadow Banks

NBFCs have come under scrutiny after IL&FS' collapse last year, that put light on broader debt concerns. India now deals with a bad loan problem that further curbs investment, which is required to revive the slowing economy.

Dewan Housing Finance Ltd (DHFL), the shadow bank that was worst hit by the IL&FS crisis, recently submitted a draft resolution plan with a proposal to convert debt to equity while seeking to sell assets and raise more capital.

Meanwhile, Kotak Mahindra and HDFC Bank were the only gainers in the banking segment in trade on Tuesday.