Rating agency Moody's on Monday said Indian banks' asset quality will be stable but weak as the clean up of legacy problem loans nears completion and corporate health improves.

"Banks have recognized the bulk of legacy problem loans and will start making recoveries from large resolved non-performing loans (NPLs), which will help shore up asset quality, although the degree of success in resolution of large NPLs will determine the extent of asset quality improvements," the rating agency said.

Moody’s Investors Service in the annual Banking System Outlook on also said capitalization at public sector banks will remain weak but the government support will provide relief. Public sector banks will continue to grapple with weak capitalization and depend on government capital injections to meet minimum capital requirements.

It further added that profitability of the lenders will improve but remain weak due to high credit costs.

While net interest margins (NIMs) will widen marginally due to a reduction in NPAs, credit costs at public sector banks will remain high despite a decline, and this will weigh on system-wide profitability.