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Fitch Ratings has said the operating environment for Indian banks has strengthened as economic risks associated with the Covid-19 pandemic have ebbed. It said India was badly affected by the pandemic, but the associated risks have now receded. The easing of pandemic-related risks has been accompanied by a strengthening of capital buffers.

It also said a number of prudential indicators for the sector have also improved compared to pre-pandemic levels, and the operating environment score continues to benefit from the economy’s well-diversified structure, which helps to reduce banks' exposure to specific sector-focused shocks. The large size of the economy and India’s favourable demographics should offer banks opportunities to generate profitable business and diversify risk and revenue. Fitch revised its OE (operating environment) mid-point score for Indian banks to 'bb' from 'bb+' in March 2020 after assessing that the pandemic was likely to worsen the existing OE stresses facing the sector.

Besides, Fitch said it expects banks to benefit from the gradual formalisation of the SME sector through initiatives like the Goods and Services Tax and rapid digitalisation (including payment systems), which will improve the prospects for providing services at acceptable levels of risk to this substantial part of the market.