Hong Kong, April 27 (IANS) American credit rating agency Moody's on Wednesday retained India's outlook at 'positive' saying the country's history of double-digit inflation, high government debt levels, weak infrastructure and a complex regulatory regime have constrained its credit profile, while China featured high on the scale of leverage, or debt, risk for sovereigns in the region.

In its report on Asia-Pacific sovereigns, Moody's Investors Service also cautioned that a prolonged worsening in asset quality at state-run banks is the main threat to India's sovereign credit profile and suggested the government provide for higher recapitalisation of stressed banks.

"The main threat to the sovereign credit profile would be via a significant and prolonged worsening in asset quality at state-owned banks, beyond the recognition of bad loans currently under way, that causes contingent liabilities to crystallise on the government's balance sheet," it said.

"Our positive outlook on India's rating is based on our expectation of continued but gradual policy efforts to reduce the sovereign risks posed by high fiscal deficits, volatile inflation and weak bank balance sheets," it added.

The report also said that implementation of the Goods and Services Tax (GST) and bridging large infrastructure deficit are a difficult task before India's government.

Moody's, which has given for India a credit rating at 'Baa3' that is just a level above their junk category, said it would consider a rating upgrade after 12-18 months, depending on improvement in macroeconomic parameters.

Public sector banks (PSBs) are currently engaged in an asset quality review (AQR) following a Reserve Bank of India directive, which has led to an increase in bad loans and provisioning.

Industry body Assocham said last week that the slowdown in steel, textiles, aluminium and others coupled by the ongoing AQR is likely to push banks' stressed assets to Rs.10 lakh crore-mark in the fourth quarter of 2015-16.

"At the end of December (2015), the total stressed assets of all the banks were at Rs.8 lakh crore which is expected to see a significant jump in the current quarter itself," said a study by the industry body.

It said total stressed assets of banks rose four-fold to Rs.7.40 lakh crore by the end of March 2015 from Rs.2.33 lakh crore as of March 2011.

Assocham noted that in nine months from April to December 2015, gross non-performing assets (NPAs), or bad loans, rose by Rs.1 lakh crore from Rs.2,98,641 crore to Rs.4,01,590 crore.

In percentage terms, gross NPA ratio of public sector banks shot up from 5.43 percent in March 2015 to 7.30 percent by December 2015, while mounting loans have made 11 PSBs report losses of Rs.12,867 crore in Q3 of 2015-16.

Noting that China, which has 'Aa3 negative' rating and whose state-owned enterprise (SOE) liabilities are particularly large, Moody's said on Wednesday that total liabilities in the SOE sector rose to more than 115 percent of GDP in 2015, from under 100 percent in 2012.

"Stress in China's SOE sector implies a rising probability that some liabilities will crystallize on the government balance sheet. China's climbing debt burden and sizable contingent liabilities were a key driver of our decision to place a negative outlook on the sovereign rating in March 2016," the report said.

"Three factors will likely determine sovereign credit trends in the region. First, the degree and nature of the build-up in leverage, and the extent of buffers that counterbalance related risks. Second, how economies respond tothe opportunities and challenges offered by China's rebalancing," it added.