The Nifty fell for a fifth straight session and ended at its lowest in a month, as lenders retreated on a media report that the country's central bank was demanding higher provisioning for loans submitted under the insolvency process.
The broader NSE index closed down 63.55 points or 0.66 per cent at 9,511.40, its lowest close since May 25.
The benchmark BSE index ended 179.96 points or 0.58 per cent lower at 30,958.25, closing below the 31,000 mark for the first time since May 25.
The Nifty PSU Bank index slid as much as 3.5 per cent to its lowest since March 24.
Among BSE sectoral indices, banking index fell the most by 1.45 per cent, followed by realty 1.4 per cent, PSU 1.32 per cent and capital goods 1.2 per cent, while only consumer durables index was up 0.33 per cent.
Top five Sensex gainers were Bharti Airtel (+1.61%), ONGC (+1.23%), Hero MotoCorp (+0.97%), Tata Steel (+0.6%) and Adani Ports (+0.56%), while the major losers were State Bank of India (-3.27%), Axis Bank (-2.34%), Infosys (-1.8%), Asian Paints (-1.73%) and Bajaj Auto (-1.61%).
The Reserve Bank of India has asked banks to set aside at least 50 per cent of the loan amount for accounts referred to bankruptcy courts, according to a media report citing two bankers familiar with the order. The move could hurt banks' earnings to the tune of Rs 50,000 crore, it reported.
Analysts expect government-owned banks to be the worst affected as they hold the chunk of defaulted loans in the country.
“PSU banks will be under pressure for some more time as improvement in earnings for these banks will get delayed due to higher provisioning requirement,” said Siddharth Purohit, senior research analyst at Angel Broking.
Domestic sentiment was also hit owing to lack of directional cues from global markets as investors were looking forward to central bankers' speeches.
Federal Reserve Chair Janet Yellen is scheduled to take part in a discussion on global economic issues at London's Royal Academy and a number of other top Fed officials are also due to speak later in the day. Yellen's speech will offer clues on the outlook for US monetary policy.
A number of other top central bank officials are also expected speak at events on Tuesday, including the ECB's Mario Draghi, the Bank of England's Mark Carney and Fed officials Patrick Harker and Neel Kashkari.