Moody's made the comments in a statement made available to Reuters on Wednesday. "Moody's adds that the asset quality of the banks is weighed down by numerous sour loans, noting that this situation is worsened by loose classification and provisioning standards, by a debtor-friendly legal system, by stock market losses, by industrial restructuring that generates more non-performers, and by the difficult domestic and international environments."

"Moreover," the rating agency says, "the reform process initiated in 1991 slowed down three years later for political reasons, and the result is that plans for fiscal tightening, deregulation, and privatisation of public sector banks has fallen behind schedule."

"In the absence of vigorous reform, robust unions make it very hard to streamline public sector banks and cannot be laid off or branches closed.

At present, the current average for the financial strength ratings of India's rated banks was around an "adequate" D, or very slighly lower, which was above the averages of China and Egypt but below that of Turkey and the Czech Republic, it added. With few exceptions, Indian public sector banks and financial institutions were placed at the country ceilings of BA2 for foreign currency bonds and BA3 for foreign currency bank deposits, to reflect implied government support in case of need, the Moody's report said. "Moody's also points to poor levels of automation as a constraint on quality of service and the range of products offered.

"These entrenched inefficiencies mean that the only way to boost profits is to expand business volumes," Moody's analysts conclude.

"Government interference continues because it owns or controls the vast majority of banking sector capital a situation that does not particularly help corporate governance, either," Moody's says.

"Consequently, the rating agency is concerned about the number of politically motivated appointments in management and by directed lending for governmental goals.

"The rating agency also concerned about Indian banks that it has factored into its rating estimates. "Indian authorities are clearly striving, although hindered some what by politically induced stops and starts, to create a well-regulated, increasingly liberalized banking sector, which bodes well for the banks' financial strength in the long term.

"Moreover, Indian commecial banks have a reliable deposit base that is growing faster than their loan portfolios."