"A deterioration in credit conditions is already being felt in India, where slower economic growth and rising interest rates have made it tougher for borrowers to repay debt," Moody's Analytics said in the report.
Non-performing assets (NPA) increased from a low of 2.3 per cent in 2011 to about 4 per cent in 2013.
Public sector banks, which account for about 75 per cent of total lending, are behind the increase in non-performing loans, it said.
"The government has encouraged lending in an effort to support development of the country's inadequate infrastructure, but although these intentions are positive, delays to projects and other regulatory issues have weighed on revenue, and thus, developers' ability to repay debt," it said.
According to the report, the government and the Reserve Bank of India are tackling the issue now to ensure non-performing loans don't become a bigger problem.
The government has provided financial support to banks, it said, adding that the RBI has also increased its monitoring of banks.
"Measures such as offering incentives to banks that identify debt problems early, and selling off or restructuring loans before they turn sour, will help manage banking risk," it said.