National Stock Exchange's benchmark for banking stocks fell 1.5 percent on concerns of higher level of impaired assets across the banking sector due to a combination of global uncertainty and government's reduced fiscal flexibility.
Fitch Ratings says fiscal 2013 impaired assets across the banking sector may exceed its initial forecast as the economy slows.
The rating agency adds that absolute cumulative gross NPLs reported at India's five largest banks - accounting for over a third of the system assets - increased by around 62 percent in the first quarter of FY13.
Fitch expects stressed assets in the system, including unseasoned restructured loans, to rise to about 10 percent by FY13 end from 6.7 percent in FY10.
Morgan Stanley also downgraded Axis Bank on Wednesday to "underweight" from "equal weight", as it expects the impaired loan formation of Axis Bank to rise to 4 percent of total loans in FY14.
Axis Bank fell 4.4 percent while ICICI Bank fell 2.7 percent. State Bank of India was down 1.3 percent.
Bank stocks were a major drag on the index, which fell about 1 percent.