Indian banks may rein in lending growth already near the slowest pace in five years after regulators ordered them to set aside more funds to counter bad debt.

From April 1, lenders will have to lift capital levels to cover 15 percent of restructured loans in arrears, up from 5 percent. That's going to increase banks' liabilities and reduce their reserve buffers, the three main rating companies say.

Banks that are more cautious on lending are failing to pass on interest rate cuts, holding back Prime Minister Narendra Modi's efforts to achieve growth as high as 8.5 percent next fiscal year. Distressed loans soared to a record 4.2 trillion rupees ($67 billion) in December, 6.2 percent of total advances, data from the Reserve Bank of India show.