The NSE Nifty 50 index closed down 0.56% to 11,131.8 and the benchmark S&P BSE Sensex ended 0.51% lower at 37,934.73.
Banking stocks slid after a report released by the Reserve Bank of India (RBI) on Friday evening said bad loans could rise as much as 15% of the total loans by March 2021.
The report further said the pandemic could increase financial vulnerabilities, including corporate and household debt burdens in the case of a severe economic contraction.
Rating agency Fitch on Monday also said India's state-run banks would have "substantially higher" recapitalisation requirements as a pandemic-led asset quality deterioration begins.
The Nifty banking index fell as much as 3.6%, with HDFC Bank shedding 3.3% and Axis Bank dropping 3%. The state-run banking index declined as much as 3.3%.
ICICI Bank fell about 6% after the lender reported a profit that missed estimates for the quarter ended June as its provisions for bad loans rose sharply.
IT stocks capped losses and the sector's main sub index rose 0.7%. HCL Technologies rose 3.13%, Infosys gained 2.8% and Tata Consultancy Services advanced 2.3%.
Total cases of COVID-19 in India saw a record jump of nearly 50,000 infections over the last 24 hours and touched 1.44 million by Monday morning, according to government data https://www.mohfw.gov.in.
Prime Minister Narendra Modi said on Sunday the country needed to be "extra vigilant" as the threat from the virus persisted.
(Reporting by Derek Francis in Bengaluru; Editing by Shinjini Ganguli)