Amid growing indications of a global economic slowdown, the Moody's Investor Service decided to downgrade the outlook for India's banking system to "negative" from "stable" on Wednesday.

Moody said that the slowing growth in the domestic as well as international markets was affecting asset quality, capitalization and profitability of the Indian banks. It said in a statement that a slowdown in growth as well as an increased borrowing by the government is set to reduce funds available in the private credit market.

Vineet Gupta, Moody's vice-president and senior analyst said, "With asset quality, given the tightening environment, we anticipate that it will deteriorate over the next 12-18 months, thereby causing an increase in provisioning needs for the banks in FY2012 and FY2013."

The agency says that a negative outlook indicates volatility and uncertain conditions in the segment. Monetary tightening and a slowdown in the economy is set to reduce the growth in bank loans and the deregulation of interest rates on savings accounts will put pressure on profitability.

The index of banking shares fell after the news of the downgrade, to 11,307.99, down 0.1 percent, against a 0.2 percent rise in the benchmark index.