Reserve Bank of India (RBI) issued a significant update to the Commercial Banks – Credit Facilities Amendment Directions, 2026, which notably tightens the norms for bank lending to stockbrokers and other capital market intermediaries (CMIs).
These rules, which come into effect on April 1, 2026, are designed to curb speculative market activity and reduce systemic leverage.
Key Regulatory Changes
The new guidelines introduce several strict mandates that fundamentally change how brokers access credit:
- 100% Secured Funding: All credit facilities provided by banks to CMIs must now be on a fully secured basis. Previously, banks had the flexibility to accept unsecured instruments or partial guarantees; now, a ₹100 loan requires ₹100 worth of eligible collateral.
- Ban on Proprietary Trading Finance: Banks are now strictly prohibited from funding a broker’s proprietary trading (trading for the firm’s own account). Exceptions are limited to specific functions like market-making and short-term warehousing of debt securities.
- Stricter Bank Guarantees: For guarantees issued to exchanges or clearing corporations, banks must demand at least 50% collateral, of which at least 25% must be in cash.
- Higher Haircuts on Equity: When brokers pledge equity shares as collateral, banks must apply a minimum 40% haircut (valuation discount) to account for market volatility.
- Ongoing Monitoring: Collateral cover must be maintained on a continuous basis. Facility agreements must now include explicit margin call clauses to address any shortfalls immediately.
Why is the RBI doing this?
The central bank’s move is a proactive step to prevent “leverage-driven excess” in the capital markets.
- Curbing Speculation: Proprietary trading firms have recently accounted for over 50% of equity options turnover. By cutting off bank credit for these activities, the RBI aims to reduce high-frequency speculative volumes.
- Closing Loopholes: The directive prevents brokers from diverting short-term working capital loans—traditionally meant for operations—into speculative market trades.
- Risk Management: By mandating cash-backed guarantees and higher haircuts, the RBI is ensuring that banks are insulated if market volatility leads to broker defaults.
Impact on the Market
- Brokers: Will face increased “capital blockage” and higher costs for bank guarantees. Smaller firms or those heavily reliant on proprietary trading may see a significant squeeze on their profit margins.
- Market Volumes: Analysts expect a potential dip in trading volumes, particularly in the derivatives (F&O) segment, as leverage becomes more expensive and harder to obtain.
- Banks: While their lending to this sector will be safer, it will now be strictly counted under “Capital Market Exposure” (CME) limits, which could cap the total amount of credit they can extend to the industry.
