Secondly, investment in securities of various kinds gained in importance, bringing in its wake a greater exposure to stock markets. This was indeed a part of the reform effort. As an RBI-SEBI joint committee on bank exposures to the stock market noted: "Globally, there is a shift in the asset portfolio of banks from credit to investments keeping in view the fact that investments are liquid and augment the earnings of banks. The Committee feels that banks' participation would also promote stability and orderly growth of the capital market." The impact of this on scheduled commercial banks in India is visible from Charts 1 and 2, which point to the sharp rise in investments by banks, which to a significant extent is due to bank preference for credit substitutes.
 
Initially, the investments were largely in safe government and other approved securities which, in the wake of financial and fiscal reform, were offering banks relatively high returns. Bank holdings of these securities crossed the floor requirement set by the SLR. But in time, with the returns being offered by non-SLR securities of different kinds on the rise, banks have tended to move in that direction as well. As Chart 4 shows, over the last four years there has been a sharp increase in investments in non-SLR securities with the share within such investments accounted for by loans to corporates against shares, investments in private equity and in private bonds, debentures and preference shares also increasing over time.
Chart 4 >>
 
These, however, are aggregate and average figures and conceal the differential distribution of such exposure across different kinds of banks. Such differentials have been substantial. Consider, for example, bank lending to sensitive sectors such as commodities, the real estate and the capital market (Chart 5). While, the sum total of such lending is still small, there are some segments of the banking sector, especially the old and new private sector banks that are characterized on average by a much higher degree of such exposure.
Chart 5 >>
 
Taking the exposure of banks to the stock market alone, it can be seen to occur in three forms. First, it takes the form of direct investment in shares, in which case, the impact of stock price fluctuations directly impinge on the value of the banks' assets. Second, it takes the form of advances against shares, to both individuals and stock brokers. Any fall in stock market indices reduces, in the first instance, the value of the collateral. It could also undermine the ability of the borrower to clear his dues. To cover the risk involved in such activity banks stipulate a margin, between the value of the collateral and the amounts advanced, set largely according to their discretion. Third, it takes the form of "non-fund based" facilities, particularly guarantees to brokers, which renders the bank liable in case the broking entity does not fulfill its obligation.
 
In the aggregate the sum total of such exposure of the scheduled commercial banks appears limited. As the RBI's technical committee on bank financing of equities noted, as on January 31, 2001: "The total exposure of all the banks by way of advances against shares and debentures including guarantees, aggregated Rs. 5,600 crore, comprising fund based facilities of Rs. 3385 crore and non fund based facilities, ie., guarantees, of Rs. 2,215 crore". Such exposure constituted 1.32% of the outstanding domestic credit of the banks as on March 31, 2000.