New Delhi, Feb 11 (IANS): India's 2021 economic recovery reduces the likelihood of a sharp deterioration in asset quality at the country's public sector banks, said Moody's Investors Service in a report.

However, the ratings agency said banks' capitalisation will remain insufficient to absorb unexpected shocks and support credit growth.

"Various measures by the Indian government to support borrowers have helped curb growth in public sector banks' nonperforming loans (NPLs), and the volume of restructured loans is not as large as we anticipated," said Rebaca Tan, a Moody's Assistant Vice President and Analyst.

According to the report, asset quality at the five largest rated public sector banks (PSBs) in India -- State Bank of India, Bank of Baroda, Punjab National Bank, Canara Bank and Union Bank of India -- improved mildly in the first nine months of the year ending March 2021 (fiscal 2021) despite an economic contraction exacerbated by the pandemic.

The report cited that gross NPL ratios of the five banks declined by an average of about 100 basis points at the end of 2020 from a year earlier, even including loans that have become delinquent since the end of August 2020 but are not formally classified as NPLs because of a pending case in the Supreme Court.

Nonetheless, it noted that India's public sector banks will continue to face capital shortages as their profitability remains weak given high credit costs, leaving them vulnerable to any unexpected stress.

Recently, the Centre proposed to infuse Rs 200 billion in equity capital into public sector banks in fiscal 2022, on top of the Rs 200 billion budgeted in fiscal 2021.

"While the government's capital infusion into public sector banks will help them meet Basel capital requirements, it will not boost credit growth," Tan added.