Global rating agency, Moody stated that it expects interest rates to soar in a period of next 12 months.

The agency also expects rise in NPAs in the third quarter of this fiscal.

It is revealed that both aspects will inversely affect the banks' earning margins.

The bottom lines may not be significantly affected, and can be balanced by low cost funds including savings and salary accounts, low-cost deposits and salary accounts.

Nondas Nicolaides, VP & senior analyst, Moody's, explained, "Interest rates, in the medium-term, they may start inching up and this may put some pressure on banks' margin. This is because deposits start rising faster than lending rates in India."

The agency expects 15-16 percent growth in credit financial year 2010-11, with GDP growth rate projected at 6 percent.

Parallel to interest rate challenge, banks are also facing problem of high NPAs. The agency notes that the gross non-performing assets in sectors like gems and jewellery, textiles, auto parts and retail have been rising, along with increasing defaults in personal loans and credit card delinquencies.

In a statement agency said, "Given that a substantial restructuring was done till June 2009, post-September'09 we might see NPAs going up. From 3 to 3.5% as of end March'09, we estimate that NPAs would rise to 4-5% by end of March'10."