RBI tightens lending norms for stock brokers

Metro India News | MUMBAI

The Reserve Bank of India (RBI) has introduced stricter guidelines on bank lending to capital market intermediaries (CMIs), including stock brokers, through amendments to the Commercial Banks – Credit Facilities Directions, effective April 1, 2026. The changes, detailed in a circular issued on February 13, 2026, mandate fully secured credit facilities, prohibit bank funding for proprietary (prop) trading, and impose rigorous collateral requirements, aiming to curb speculative activities in the derivatives segment.

According to expert analysis on financial channels, the circular is particularly stringent for prop traders and prop-focused brokers, who rely heavily on bank guarantees to fund their own-book trading. For proprietary trades, banks must now back guarantees with 100% collateral, including at least 50% in cash or cash equivalents (with definitions pending full clarification, potentially including government securities and equities subject to haircuts). 

This marks a shift from prior practices where partial unsecured guarantees or promoter guarantees were common. In contrast, requirements for client-based trades remain largely unchanged: bank guarantees to clearing corporations still require a minimum 50% collateral, with 25% in cash. Large listed brokers, such as HDFC Securities, Angel One, SBI Securities, and others primarily serving retail and institutional clients, are expected to face negligible to zero impact, as their prop books are minimal or non-existent.

Prop brokers—often smaller "mom and pop" operations or specialized firms that trade solely with their own funds without accepting client money—account for a significant portion of futures and options (F&O) volumes, estimated at around 40% overall and higher in the options segment. These entities provide substantial liquidity to the market, but the increased borrowing costs and collateral demands could reduce their activity, leading to wider spreads, higher impact costs, and lower intraday volumes, particularly on expiry days.

The expert highlighted that while most banks remain comfortable with capital market exposures under existing prudential limits, the circular provides greater clarity on permissible collateral types, haircuts (e.g., minimum 40% on equities), and ongoing monitoring with margin call provisions. It also opens new avenues for banks, such as lending for margin trading facilities (MTF)—previously restricted—and funding against non-MTF trade receivables, potentially unlocking opportunities in the over Rs 1 lakh crore MTF market.

The move aligns with broader regulatory efforts, including recent STT increases in the Budget and SEBI actions, to moderate speculative trading in derivatives. Market participants anticipate a 15-20% decline in overall F&O volumes starting April 1, 2026, with intraday segments bearing the brunt. This could indirectly pressure exchange revenues from transaction fees.