Global rating agency Moody's today upgraded its outlook on the state-run lenders Central Bank of India and the Indian Overseas Bank (IOB) to positive from stable on the back of capital infusion from the government.

It affirmed the long-term local and foreign currency bank deposit ratings of both the lenders at Ba3.

The agency also affirmed the banks' baseline credit assessments (BCAs) at b3 and their counter-party risk assessments (CRA) at Ba2(cr)/NP(cr).

Under the government's recapitalisation plan, the Central Bank of India will receive Rs 5,160 crore, while IOB will get Rs 4,690 crore in new capital.

"The positive outlook reflects the upward pressure that could develop on these banks' long-term ratings, if their credit fundamentals -- namely capital positions -- continue to improve over the next 12-18 months due to capital infusions from the government," Moody's said in a report.

The outlook also reflects the agency's view on the expected evolution of their balance sheets, including a stabilisation in asset quality, a moderate improvement in profitability metrics, and stable funding and liquidity positions, the report added.

The government in October 2017 had committed to infuse Rs 1.53 lakh crore into the public-sector banks (PSBs) by March 2019.

It will pump in Rs 80,000 crore into 20 PSBs by March 2018 in the form of recapitalisation bonds, while Rs 10,000 crore will be infused from budgetary sources by March 2018.

The government will infuse another Rs 65,000 crore in new capital in fiscal 2018-19.

The government has made it explicit that all PSU banks will meet their minimum regulatory capital requirements after factoring in the provisioning requirements for non-performing loans (NPLs) as well as requirements resulting from the transition to IFRS 9 accounting standards in April 2018.

"We continue to assume a very high probability of government support for CBI and IOB, resulting in a three-notch uplift to their deposit ratings from their BCAs," the rating agency said.

According to Moody's, the rating on both the banks could be upgraded in the next 12-18 months, if the capital infusion helps strengthen their capital to a level above minimum regulatory requirements under Basel III standards and they returns to profitability on a sustainable basis.

The rating agency, however, said downward pressure on the banks' ratings may emerge if further credit losses worsen its capital position and if the government support diminishes.