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 S&P Global Ratings on Tuesday raised its assessment of India's banking sector, citing a "strong recovery" underway in the Indian financial sector.

India's 'Banking Industry Country Risk Assessment', an indicator of an economy's financial sector, has been raised one notch to 5 from 6 earlier, the rating agency said in a note.

Risk scores range from 1 to 10, with 10 signalling the highest risk.

"We believe asset quality will continue to strengthen, benefiting from structural improvements in the operating environment and India's good economic prospects," S&P said.

The rating agency also upgraded four financial institutions and raised its assessment of the credit profiles of four banks.

Bajaj Finance, Hero Fincorp, Shriram Finance, and Union Bank of India were upgraded by one notch each.

The standalone credit profiles of HDFC Bank, ICICI Bank, and State Bank of India were also raised by one notch.

"We expect India's financial institutions, especially the public-sector banks, to sustain their improvement in capital positions," S&P said.

"Bank earnings will also likely be comparable to other emerging market peers, although margins could decline as the banks reprice deposits."

The rating agency sees net credit costs, an indicator of cost attached to bad loans, to remain at about 1.2% over the next few years, with new bad loans seen at "cyclical lows" over the next two financial years.