Moody's Investors Service said its outlook on Indian banks will remain negative for next 12-18 months as the asset quality is weakened in the current uncertain macro economic environment and this will lead in creation of further stress on bank's profitability.

The global credit rating agency has had a negative outlook on the Indian banking system since November last year.

The practices on the loan classification, particularly on restructured loan and provisioning practices are weak in the Indian banking system. The rating agency believes banks mask the extend of their asset quality and capital challenges.

In a statement from Vineet Gupta, vice-president and senior analyst at Moody's said, "This environment is characterized by slow economic growth, high inflation, high interest rates and a weak local currency, and we expect these factors to lead to further deterioration in asset quality, an increase in provisioning costs and a fall in profitability".

The agency said that it expected restructured loan portfolios and a difficult operating environment of Indian banks in the coming quarters. Mr. Gupta also said that some of the banks would need additional money to strengthen their capital base.

Mr. Gupta further added, "When we also consider the high level of loan growth which, at about 15 per cent annually, is expected to continue outstripping internal capital generation, then most of Moody's rated Indian banks will be challenged to maintain capitalization levels at current levels, and some will even need to raise new capital externally". The agency however, believes that the government will provide support in the form of capital injection and unsecured loans to both private and public sector banks.