Chennai, Jan 9: Global credit rating agency Moody's on Monday said asset deterioration is a challenge for Indian banks over the medium-term.

Moody's Investor's Service and its Indian affiliate ICRA Ltd said in a statement the prospect for Indian banks were subdued.

"Asset quality will remain a negative driver of the credit profiles of most rated Indian banks and the stock of impaired loans. Non-performing loans (NPLs) and standard restructured loans will still rise during the horizon of our outlook," Moody's Vice President and Senior Analyst Alka Anbarasu said.

"We expect the pace of deterioration in asset quality over the next 12-18 months should be lower than what was seen over the last five years, and especially compared to FY2016, even as we consider those remaining problem loans which have not been recognised as such in several large accounts," Anbarasu added.

According to Moody's, Indian banks would increase their focus on resolving some of the large problem loan accounts.

Anbarasu said there will be increased pace of debt restructuring under various schemes designed by Reserve Bank of India (RBI). But the weak reserving and pressure on profitability would limit bank's ability to go for bad loan account resolution under RBI schemes.

From ICRA's viewpoint, a muted level of credit off-take -- on the back of weak demand, increasing competition and greater disintermediation -- will continue to exert downward pressure on lending rates.

"Such a development will be partly offset by the fall in the cost of funds, but stubbornly high operating expense levels and elevated credit costs will continue to dent profitability matrices for the banks," said Karthik Srinivasan, an ICRA Senior Vice President.

Asset deterioration a challenge for Indian banks: Moody\'s