The BSE Sensex is down 0.8 percent, while the Nifty falls 0.6 percent. ICICI Bank falls 4 percent, while HDFC Bank and Axis Bank are down 1.8 percent and 1.4 percent respectively, as the finance ministry and central bank investigate allegations of money laundering practices at top private sector lenders.
Meanwhile, Goldman Sachs said in a report that the allegations, if proven, could slow growth for private sector lenders in India.
S&P's comments that the economic support for India's sovereign ratings has weakened "somewhat" given the sluggish growth in Asia's third-largest economy, is also having an impact on rate-sensitive stocks.
Among other rate-sensitive stocks, DLF Ltd falls 3.5 percent, while Tata Motors Ltd is down 2.5 percent.