Finance Ministry advises banks to support brokers

North Block has advised the banks to give support to the brokers who had taken loan from the banks to invest in share market in order to avoid payment defaults

Following the advice of the finance ministry many banks have started working on plans to give assistance to brokers to make sure they do not default on any payments in the course of an unstable stock market.

“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.

In due course banks can also decide on not selling securities which have been kept as guarantee with them by borrowers. “We are confident that the stock market would stabilize as the current turbulence is a short-term phenomenon,” the BOI official added.

All the decisions would be taken within the prudential framework like hold on 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 are using market conditions for buying fundamentally strong stocks at cheap prices.

On Tuesday Life Insurance Corporation (LIC), the country’s largest financial institution, purchased shares worth Rs 650 crore, over and above the Rs 900 crore of purchases done since the market slide began last week.

On normal days, LIC’s do the trading of shares is around Rs 100 crore per day. Whereas the sharp fall in stock prices has given LIC an opportunity to buy large volumes of shares of many fundamentally strong companies at attractive valuations. LIC have a strong preference for large cap stocks which form the NIFTY index.

According to the figures available with the BSE, domestic institutions have bought net 2778.71 crore and FIIs have net sold 4265.19 crore.

A finance ministry official said no specific directives or instructions have been given 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.

According to another finance ministry official public sector banks and financial institutions are being encouraged to purchase as much as equities as possible on the market, not engaged in panic sales of shares and show leniency towards brokers demanding additional margin money.

Public sector units in the market have also been asked not to engage in sale of securities deposited by brokers for margin requirements as part of their internal “stop loss” thresholds.

The idea behind all this is not to take any such 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 involvement of the government through public sector in a falling stock market financial intermediary 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.”