Global ratings agency Moody's today said it has a "negative" outlook on the country's banking system due to concerns over asset quality and the high interest rates.
"In India, impaired loans are yet to peak among public sector banks," Moody's said in its Asia-Pacific Banking Outlook.
The agency further said though the government is "likely to remain supportive", options for the Reserve Bank to slash lending rates are limited due to high inflation and the "modest fiscal capacity".
RBI has not given into the growing pressures to ease its elevated interest rate, which is one of the highest in the world and the highest amongst the BRIC nations, citing the high inflation and the government's inability to reign-in the fiscal deficit at desired levels.
However, the Moody's report said interest rates are likely to fall during 2013 but still they will remain higher than the rest of Asia.
Noting that 94% of the banks it rates in Asia carry stable outlooks on their deposit ratings, Moody's said the negative outlook on specific banks mostly relate to India.
On the compliance with the stricter Basel-III regulation, which require higher capital reserves, it said that most of the Asian banks comply with the requirements but the pressure to compete with peers from the Western countries facing delays in execution may have forced countries like India to delay implementation.
The Reserve Bank had delayed the implementation of Basel III by three months to April 2013, from January 2013 earlier.
The BSE's banking index Bankex slipped 0.21% to 14,520 points as against the 0.31% gains on the Sensex.