The finance ministry is considering a proposal for allowing banks and financial institutions to trade in the commodities market.

"The presentations have been made by market intermediaries to the Reserve Bank of India and finance ministry for allowing banks and FIs to trade in the commodities market. The government is considering the proposals," official sources told PTI in New Delhi on Monday.

The banks can take a maximum exposure of 5 per cent of their advances in the equities market. Although they are also allowed to import and sell gold, banks are not yet allowed to invest in the commodities market as such.

There is also a proposal with the government for allowing the foreign institutional investors registered with the RBI to take part in the commodities trade, they said.

Some of the FIIs are very active in the commodities markets abroad and are eyeing the Indian markets as well.

At present, the banks, FIs and FIIs can invest in only equity and debt markets. While equity and debt constitute major chunk of their portfolios, commodities are also being eyed in the wake of sharp movements in prices of gold in recent times.

The move to involve banks, FIs and FIIs in the commodities market can be seen in the light of international experience where institutional investors play a lead role in price determination of many items, including gold and silver.

The commodities market in developed nations is three times bigger than the equities market, sources said, adding this is bound to happen in India as well considering the huge agrarian market.

The lack of interest from institutional investors in the Indian commodities market can also be seen in the light of inadequate infrastructure in terms of trading platforms and a full-fledged commodities exchange.

Currently, the commodities futures trading takes place in select bourses under the ambit of Forward Markets Commission, a part of the consumer affairs ministry.

However, the start of commodities derivatives trading in National Commodity & Derivative Exchange has evinced interest among the big players.

NCDEX, which is being promoted by ICICI Bank, LIC, Nabard and NSE, hopes to start on-line trading operations from October in 40 cities across the nation.