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Moody's Investors Service in its latest report has said that India's economic recovery reduces the risk of a sharp deterioration in public sector banks' (PSBs) asset quality. However, the capital would remain insufficient to support credit growth and absorb unexpected shocks.

The agency has stated that with high credit costs continuing to suppress their profitability, the banks' capital buffers will remain insufficient. It also stated that the government plans to infuse Rs 20,000 crore in equity capital into PSBs next fiscal. It noted that while the amount will help the banks meet Basel capital requirements, it will not boost credit growth.

According to the report, 'various measures by the Indian government to support borrowers have helped curb growth in public sector banks' non-performing loans (NPLs), and the volume of restructured loans is not as large as we anticipated'. However, it said 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.