Indian banks may face rising loan defaults

The Indian banking sector faces the challenge of tackling rising defaults due to slowing economy, even as the banks in the country do not have toxic assets, which triggered financial crisis elsewhere, rating agency Moody's said.

"With India's banking system, rising loan delinquencies - against the backdrop of a slowing economy - are challenging the banks' asset quality and profitability," Moody's said in a report, titled Asia Banking Outlook, 2009.

The slowdowns are clearly making themselves felt on the performances of banks in Southeast Asia and India, Moody's Financial Institutions Group Asia Pacific MD Jerry Chien said.

However, the rating agency said Indian banks are free of any toxic assets and have generally weathered the international financial crisis relatively unscathed.

"They enjoy good funding and liquidity profiles, although earnings quality still needs improvement," Moody's said.

The rating agency also said some public-sector banks may need fresh capital, which could come from the Indian government.