The Reserve Bank of India (RBI) will tighten norms governing bank lending to capital market intermediaries from April 1, 2026, requiring all such credit facilities to be fully backed by eligible collateral and subject to stricter monitoring.
The revised framework will change how banks structure funding lines to brokers, clearing members and other securities firms, particularly those relying on short-term credit for settlement obligations, margin funding and market-making activities.
The changes will come into effect from April 1, 2026.
Full collateral backing now mandatory
Under the revised framework, banks must extend credit facilities to CMIs strictly on a fully secured basis. They must value collateral in line with prescribed norms and apply asset-specific haircuts.For instance, banks must apply:
- 40% haircut on listed equity shares
- 15% haircut on AAA-rated listed debt securities
- 25% haircut on sovereign gold bonds
- 15–25% haircut on commercial paper, depending on rating
Banks must continuously monitor collateral values and ensure that the exposure remains fully covered after adjusting for haircuts. If the collateral value falls, banks must seek additional security or reduce the facility.The directions also prohibit banks from financing proprietary trading or investments undertaken by capital market intermediaries. While banks may provide need-based facilities for working capital, settlement timing mismatches, margin trading funding and market-making activities, they cannot fund brokers’ own trading positions.
Ajay Garg, director and CEO of SMC Global Securities, described the move as a “structural shift” in how brokers, particularly those with significant proprietary trading operations, will access bank funding. He said the framework may moderate leverage among brokerage firms and push proprietary desks to scale down trading or rely on internal capital and alternative funding sources. Brokers focused mainly on client-based activities are unlikely to see meaningful impact on their core operations.Exposure caps remain in place
The RBI has retained aggregate prudential ceilings on capital market exposure. A bank’s total CME cannot exceed 40% of its Tier 1 capital on both solo and consolidated basis. Direct capital market exposure, which includes certain investment exposures and acquisition finance, remains capped at 20% of Tier 1 capital.
The framework also requires banks to set internal counterparty limits, adhere to large exposure norms and strengthen monitoring of end-use of funds.
Market implications under watch
Broker funding from banks supports margin trading, settlement obligations and liquidity management. By mandating full collateralisation and prescribing uniform haircuts, the RBI has tightened leverage conditions in the system.
In a note on the draft guidelines, analysts at Citigroup said the changes could lead to moderation in overall trading activity in select cohorts, particularly proprietary trading. However, they described it as premature to gauge the overall profit-and-loss impact at this stage.
Citi added that transaction-driven businesses such as brokers, clearing members and exchanges are likely to see some impact as funding structures adjust to the revised norms.
The RBI said it introduced the changes to align capital market exposure rules with evolving market practices and strengthen risk management. Banks must ensure that fresh and renewed facilities comply with the revised directions from April 1, 2026, while existing exposures may continue until maturity.
