Hong Kong (CNN Business) China's banking system was on shaky ground before the novel coronavirus outbreak. Now smaller lenders are bracing for a spike in bad loans as businesses run short of cash and some banks may need to be rescued by the government.

Small businesses have been walloped by the outbreak, which forced many of them to close for weeks. Less than a third of them had returned to work by late February, according to state officials. Beijing is now trying to help by relaxing the conditions companies need to meet to obtain loans. And officials are asking banks to defer repayments.

"We think it may take years for domestic banks to revert to normal standards, with long-term repercussions for the creditworthiness of some institutions," wrote S&P Global Ratings credit analyst Ming Tan in a recent research note.

Even if the outbreak is contained by April, the value of loans that companies in China might not be able to repay could double to about 10 trillion yuan ($1.5 trillion), according to S&P Ratings. In that worst-case scenario, nearly 8% of bank loans in China would be categorized as bad or with potential weaknesses that managers need to watch closely.

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