What could ease the pressure on Indian banks' profitability?

Funding and credit costs are expected to be lower.

Profitability will remain weak for most of the Indian banks rated by Moody's as credit costs will continue to eat into a significant part of their pre-provision income. However, credit costs will be lower than in FY17, given lower NPL formation rates. This will ease pressure on profitability.

Here's more from Moody's:

Net interest margins (NIMs) will stabilize. Lending rates will remain under pressure as banks benchmark an increasing proportion of their loan books to the marginal cost of funds based lending rate (MCLR), instead of the bank rate.

MCLR is lower than the bank rate by around 50-75 basis points for most banks. On the other hand, funding costs are declining due to strong deposit inflows following demonetization. On balance, NIMs will remain stable.

However, a drop in treasury gains may be a drag on profitability. Banks benefited from a decline in yields on government securities in fiscal 2017, which enabled them to book material gains on their securities portfolios. This may not recur over the outlook period.