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Moody's Investors Service on Friday upgraded long-term currency deposit ratings for three Indian state-run lenders on improving credit metrics, better macro economic health and a bet on government support for financial institutions.

The ratings agency lifted Bank of Baroda, Punjab National Bank and Canara Bank to Baa3 from Ba1, and affirmed State Bank of India's rating at Baa3, while upgrading its baseline credit assessment and additional tier 1 securities program rating to Ba1 and (P)B1 from Ba2 and (P)B2, respectively.

Outlook on long-term ratings of all four banks remain stable, Moody's said.

The rating upgrades "reflect an improvement in India's macro profile to Moderate+ from Moderate, improving credit metrics of the four banks and Moody's continued assumption of very high level of government support to the banks in times of need," the ratings agency added.

Indian banks have been able to weather the impact of the pandemic to report an improvement in their profitability and asset quality in recent quarters.

Various liquidity-supporting measures by the government and the Reserve Bank of India during the Covid-19 pandemic have also helped lenders secure their balance sheets from future shocks.

The ratings upgrade also reflected banks' improved asset quality and profitability, Moody's said, adding that it expects this increase in profitability to be sustainable over the next 12-18 months.

Funding and liquidity will remain key credit strengths of these banks, Moody's added.

Indian banks have been shoring up their deposit base and raising capital to meet the growing credit demand.

Moody's said that credit conditions in India have gradually improved, with a significant reduction in the banks' stock of legacy problem loans over the past three years.

Corporates' financial health has also improved following a decade of deleveraging, while stress among non-bank financial institutions has abated, it said.

Further, retail loans have performed well despite pandemic-induced economic stresses, indicating better underwriting quality and relatively low household leverage in India compared to those in many other Asian countries, the rating agency added.

While India's economic growth will moderate driven by rising rates and a global slowdown, the Indian economy will perform better than emerging market peers. Because of these factors, the operating environment will remain supportive for banks, said Moody's.

Still, loans to small and medium-size enterprises continue to pose risks to the banks' asset quality because Moody's expects this segment to be the most vulnerable to interest rate rises.