S&P Global Ratings on Wednesday said an improvement in the macroeconomic conditions is likely to alleviate the stress on India’s banking sector.

It said the Indian government’s strong efforts to shield banks from the Covid-19 pandemic have largely been successful, but a hit from the pandemic is inevitable.

“While the Indian economy is on a mend, the permanent GDP loss stemming from the brunt of the coronavirus is huge at 10 per cent. We estimate the banking system's weak loans are at 12 per cent of gross loans,” S&P said in a statement.

An improvement in India’s macroeconomic conditions is likely to alleviate stress for the country’s banking sector, said S&P.

India’s economic risk trend is stable and credit risk remains very high for Indian banks. “These banks hold elevated levels of stressed corporate assets and, despite new foreclosure laws, progress on their resolution has been slow. The pandemic-induced downcycle has delayed the improvement in asset quality for Indian banks.

Small and midsize enterprises (SME) have been hit hardest, followed by retail loans, especially unsecured loans,” S&P added.

Steps by the government and the Reserve Bank of India, including an emergency credit guarantee scheme for SMEs, are likely to lessen the stress.

The Union budget announcement for fiscal 2022 also includes plans to establish an asset reconstruction company and the strengthening of the National Company Law Tribunal framework.

“These measures could benefit banks by ensuring that management resources are not spent on recoveries of weak assets. That said, India’s challenge has always been on the execution front,” it added.

S&P expects earnings of Indian banks to gradually recover from the weak base of past few years.