Following the withdrawal by Tata Sons, 25 applicants, including the Anil Ambani Group and the Aditya Birla Group, remain in the race for new bank licences.
Tata Sons is the second large business house to withdraw its application. Venugopal Dhoot's Videocon had pulled out a couple of months ago.
Mahindra & Mahindra, which initially showed interest in entering the banking sector, did not apply for a licence, citing "disadvantageous" and unclear norms.
"The company (Tata Sons) has indicated that its current financial services operating model best supports the needs of the Tata Group's domestic and overseas strategy, and provides adequate operating flexibility to its companies, while securing the interests of the group's diverse stakeholder base," the Reserve Bank of India said in a statement.
The RBI has accepted the withdrawal of the application, it said.
The Tata Group said in a separate statement that it had written to the RBI yesterday, withdrawing its July 1 application for a new bank licence.
"The company shall continue to monitor developments in this space with great interest and looks forward to participating in the banking sector at an appropriate time," it said.
After the RBI called for applications for new bank licences, 26 entities had applied by the last date of July 1.
Finance Minister P Chidambaram had earlier this month said he hoped the RBI would announce a shortlist for the banking licences in January.