Indian banks tend to take on more risks during an upturn in credit growth while non-performing loans (NPLs) of private banks are more reactive to changes in interest rates, according to the recent RBI working paper. The report highlighted a one percent increase in loan growth leads to a 4.3 percent rise in NPLs over total advances (NPL ratio) in the long run.
Post demonetization of higher currency notes, banks have received whopping Rs 12.4 lakh crore in cash deposits. Some portion of these cash deposits is expected to remain with banks, which will improve liquidity in the system. It will enable banks to ease interest rates and boost lending operations.