Global ratings agency Moody’s, on Monday, said it had a ‘negative’ outlook on the Indian 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 that though the government was “likely to remain supportive”, options for the Reserve Bank of India to slash lending rates were limited due to high inflation and the “modest fiscal capacity.’’

The 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 among BRIC countries, citing high inflation and the government’s inability to reign-in the fiscal deficit at the desired levels.

However, the Moody’s report said interest rates were likely to fall during 2013 but still they would remain higher than the rest of Asia.

Noting that 94 per cent of the banks it rates in Asia carried stable outlooks on their deposit ratings, Moody’s said the negative outlook on specific banks mostly related to India.

On the compliance with the stricter Basel-III regulation, which required higher capital reserves, it said that most of the Asian banks complied with the requirements but the pressure to compete with peers from the Western countries facing delays in execution might have forced countries like India to delay implementation.

The RBI had delayed the implementation of Basel III by three months to April, 2013, from January, 2013, earlier.

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