Here are reasons for the meltdown in banks

If we go by what RBI governor said on last Friday then it is a little negative for banks in the ultimate analysis. Immediately, it did pull down the short-term rates but not many banks borrow from the short-term market. Banks like Yes Bank, IndusInd Bank and non-banking financial companies (NBFC) would be advantaged immediately because they do depend on certificates of deposits (CD), wholesale funds which have fallen about one percentage point, therfore these banks are in advantageous position, says CNBC-TV18’s Latha Venkatesh.

However, a large number of them like those with current and saving accounts (CASA) those banks do not borrow from the CD market. For them they have priced their deposits of the repo, and if that repo is going up then their cost will also go up, so an inevitable rise in base rates. If they are not able to push that base rate up then their margins will contract. And as they push their rates up the demand will also come down, there is possibility of higher NPLs. Also read: Bank stocks melt on RBI's redoubled war against inflation
Moreover, there is also the profit taking issue. Banks are high beta, so if the Nifty moves 10 points, banks move 20 points, whichever direction. That is banks move more than the Nifty on either side. When Nifty was at 5120 or 5200 at end August, approximately the same time when the rupee was close to 67-68/USD, if one had got into banks at that time, it would be right to book profits now, especially if one was a dollar investor. Gains made by Nifty, Bank Nifty and some private banks from August 29, to September 19:
For the Nifty in rupee terms on August 28 if one had entered one would be making a rupee gain of 18 percent as of September 19, the day of the Big Ben bull run. In dollar terms, one would have made 28 percent gain.
If one had entered the Bank Nifty on August 28, one would make 33 percent in rupee terms, 45 percent in dollar terms. Only, for Axis Bank one would have made 48 percent in rupee terms, 63 percent in dollar terms, and for Yes Bank one would have made 71 percent in rupee terms and 88 percent in dollar terms. These are absolute gains.
That is the measure of gains one would have made. So, people would naturally book out since there is no further good news left.
Now that the two big central banks have spoken, it would be profit taking time. Bond yields too have risen, so with regards to that as well, one does not make bond portfolio gains, so one would naturally book out. Reason for sell off in midcap banks
Since they are even more high beta and so chances of them having more risk assets is there. As well in the big banks, there is higher current and savings account, the higher CASA so, that explains why the midcaps will react even more than the largecaps.