"However, barring further large capital infusions from the government, the credit profiles of some of the public sector banks we rate in India will remain vulnerable," it said.
It said India's banking sector will recover only marginally over the next few quarters.
"We expect the Indian banking industry's growth and profitability to gradually improve in fiscal 2018 (the year beginning April 2017), from the low base of FY 2017," S&P Global Ratings Credit Analyst Amit Pandey said.
However, the improvement will be sluggish at best, given low capacity utilisation in the corporate segment and the wait-and-watch approach of borrowers in some retail segments post demonetisation, he said.
S&P said the past few years have been tough for India's banking industry.
"Anaemic nominal GDP growth, a downcycle in the infrastructure and metal sectors, and demonetisation resulted in the lowest loan growth in several years and high stress on profitability and asset quality. We expect loan growth in India's banking sector to recover in fiscal 2018," S&P said.
A likely increase in nominal GDP growth and higher commodity prices will lead to greater working capital requirements for firms. In addition, demand in the retail, small business, and agriculture segments will normalise gradually from the lows following demonetisation.
"Both these factors will support loan growth. The pace of new non-performing loan creation is likely to abate somewhat over the next 12 months," Pandey said.
S&P said banks with sizeable corporate exposures will remain vulnerable, given their low provision coverage and inadequate resolution of stressed assets.
"The moderation of credit costs could be visible at banks that make progress on resolution and recovery of stressed assets and can grow their loan books. Weak profitability and rising capital demands from Basel III implementation will continue to pressure the capitalisation of some public sector banks in India," it said.
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