Many banks have begun to work on plans to provide assistance to brokers to ensure they do not default on any payments amid a turbulent stock market, following the finance ministry's unofficial advice to them to explore ways of supporting market players.
"The government has asked us to consider ways to help market players get over any panic", a senior official with a large public sector bank said.
"We could think of additional credit limits and adjustments in margins to certain extent," a senior Bank of India official said.
Also banks could decide not to sell securities which are pledged as collateral with them by borrowers. "We are confident that the stock market would stabilise as the current turbulence is a short-term phenomenon," the BOI official added.
All the actions would be initiated within the prudential framework like adhering to the limit on capital market exposure, said a top executive of another PSB.
"We are responsible market players, so we have to act. We are increasing our capital market exposure," the chairman and managing director of a large public sector bank told Business Standard.
Many banks and institutions have used market conditions to buy fundamentally sound stocks at cheap prices.
Life Insurance Corporation (LIC), the country's largest financial institution, purchased shares worth Rs 650 crore (Rs 6.5 billion) on Tuesday, over and above the Rs 900 crore (Rs 9 billion) of purchases made since the market slide began last week.
On normal days, LIC's trading volumes in shares is around Rs 100 crore (Rs 1 billion) per day. However, the sharp fall in stock prices has given LIC an
opportunity to buy shares of many fundamentally strong companies at attractive valuations. LIC which has a strong preference for large cap stocks which form the NIFTY index.
According to data available with the BSE, domestic institutions have bought net 2778.71 crore (Rs 27.78 billion) and FIIs have net sold 4265.19 crore (Rs 42.65 billion).
A finance ministry official said no specific directives or instructions were issued to banks and FIs to ramp up the market.
"But if they have money and mind, they will put it in the stock market", he said.
Another finance ministry official said that public sector banks and financial institutions were encouraged to purchase as much as equities as possible on the market, not engage in panic sales of shares and show leniency towards brokers demanding additional margin money.
Public sector entities in the market were also asked not to engage in sale of securities deposited by brokers for margin requirements as part of their internal "stop loss" thresholds.
The idea is to not take any steps that would cause a liquidity crisis for brokers, which can lead to severe consequences for the markets.
"Public sector financial institutions will take a higher position tomorrow. There were some fears of banks, regarding operating in a falling market. Those have been removed," the official said.
"The discussion (with some public sector financial institutions) is that the line of credit to brokers should continue as per RBI guidelines. Banks have to improve their treasury income. It is fact that whenever the banks take a position in a falling market, they make money, as the market has rallied up subsequently," the official added.
Indirect intervention by the government in a falling stock market through public sector financial intermediaries is not a new development.
Till foreign capital flows took a liking to Indian equities, public sector FI's were among the biggest players on the bourses.
Finance Minister P Chidambaram, before leaving for an overseas trip on Tuesday, said that there would be no liquidity crisis.
Speaking to reporters outside his office, he said: "I am assured by RBI and all the banks that enough liquidity will be provided to brokers and market players. Liquidity will not be an issue."
