Page 189 - DCOM208_BANKING_THEORY_AND_PRACTICE

Banking Theory and Practice

Notes Impact

The operations of banks have been immediately affected by all these initiatives, which in turn
chose to modify their credit portfolio and diversify out of their overwhelmingly dominant role
as credit-providing intermediaries. To start with, non-food credit itself was increasingly being
diverted away from the priority sectors (such as agriculture and the small scale sector), industry
and the wholesale trade, to other areas.

Example: Provision of loans to individuals for purchases of consumer durables and
investment in housing and towards lending against real estate and commodities.
While this shift increased the interest incomes that could be garnered by the banks, it also
increased their exposure to the euphemistically-termed ‘sensitive’ sectors, where speculation is
very frequent and returns are volatile.

Secondly, several kinds of investments in securities have gained importance, in bringing 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 increase 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 shift on
scheduled commercial banks in India is visible from a rise in “investments” by banks, which is
due to a significant extent to bank preference for credit substitutes.
Initially, the investments were done largely in safe securities of government and other approved
securities. But 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 bonds and in private equity, debentures and preference shares
also increased over time. These trends, however, are based on aggregate and average figures
that conceal the differential distribution of such exposure across different kinds of banks. Such
differentials have been substantial.

Example: Bank lending to sensitive sectors such as commodities, the real estate and the
capital market.

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 characterised on average by a much
higher degree of such exposure.

Task Study two term papers on liberalization of banks in India over the internet and
highlight the main points via a presentation.

Self Assessment

Fill in the blanks:

8. LPG model supported the growth and development of the ………………. capital of India.
9. ………………….. paid up capital in private banks was upto ` 200 crores which is to be
increased to ` 300 crores within three years of the commencement of business.

10. Foreign banks can conduct both …………………. and ……………….. banking.

184 LOVELY PROFESSIONAL UNIVERSITY