Global rating agency Moody's Investors Service sees public sector banks' asset quality remaining under pressure over the next 12 months.
This would be the case as banks continue to recognise non-performing loans from some of the larger leveraged corporate groups, particularly in the steel and power sectors, said Alka Anbarasu, a Moody's Vice-President and Senior Analyst.
As a result, elevated provisioning expenses will continue to constrain profitability and limit internal capital generation, she added.
Moody's Investors Service is of the view that the weak earnings outlook for public sector banks highlights their high level of external capital needs. Their capitalisation profiles will further deteriorate unless the Government provides additional capital support.
These conclusions were contained in a recently released report on "Indian public sector banks: Weak Financial Performance Highlights the Banks' High External Capital Needs".
The Reserve Bank of India mandated asset quality review has resulted in high non-performing loan ratios and increased loan loss provisioning expenses.
Eight of the 11 public sector banks rated by Moody's posted a net loss for the full year, and the other three reported a significant decline in their profitability.