The asset quality of state-owned banks will continue to be burdened by weak financial health of Indian corporates, credit rating agency Moody's said on Thursday.
It said although the asset quality of public sector banks may have hit a bottom, the recovery in corporate credit quality will take some time.
The non-performing assets of banks will continue to act as a drag on the bank's credit quality, Moody's said.
"We expect net new non-performing loan formation rates for public-sector banks to be lower than those observed over the last three years, while the impaired loan ratio may stabilise at current levels," Moody's vice president and senior analyst Srikanth Vadlamani said.
The agency said that over the next two years new NPL formation rates would witness a gradual decline.
It said the health of corporates in India, while having stabilised, continues to be fragile on an absolute basis with high debt levels and weak debt-servicing metrics.
"This is particularly relevant for public sector banks, which have a higher share of corporate loans in their loan books than private sector banks," it said.
Moody's expects that Indian corporates will increase their deleveraging efforts as conducive market conditions make it easier to raise equity and sell assets.
However, despite the favourable market conditions, it will take at least 2-3 years for a meaningful reduction in leverage owing to the high debt levels, it said, adding that the PSU banks will continue to have a high level of credit.
"This will constrain their internal capital generation and make them dependent on external capital infusion to increase their low capital levels," Moody's added.
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