State Bank of India, the country's largest lender, fell as much as 3.66 percent after ratings agency Moody's downgraded its outlook on the bank's financial strength rating to 'negative' from 'stable'.
Moody's also downgraded SBI's unsecured debt rating on par with the sovereign foreign currency bond rating.
Ratings agency Fitch downgraded some ratings for state-owned Indian Bank, Punjab National Bank and Bank of Baroda on expectations of a further deterioration in asset quality and a sharp deceleration on economic growth.
State-owned banks have seen a rise in stressed assets. Bad loans at the 10 largest banks rose 36 percent in FY13. In comparison, non-performing loans at India's three largest private sector banks rose by 8 percent in the period.
SBI's standalone credit profile continues to face negative pressures, and it will have to compete with other public sector lenders for capital injection from the government, Moody's said.
SBI's impaired loan ratio of 8.6 percent at end-June is below the 11.5 percent average for Indian public sector banks rated by Moody's.
At 0407 GMT, shares of SBI were down 2 percent at 1621.55 rupees each. Indian Bank was down 1.8 percent, Bank of Baroda fell 0.96 percent while Punjab National Bank was down 0.17 percent in early deals.