The Reserve Bank of India (RBI) has tightened rules governing how banks lend to capital market intermediaries such as stockbrokers and clearing members.
Under the revised guidelines, all credit facilities extended to capital market intermediaries must now be fully secured. The new norms will come into effect from April 1.
What Has Changed?
Earlier, banks were not required to secure the entire loan amount with collateral. Now, if a bank lends ₹100 to a broker, it must be backed by ₹100 worth of approved collateral.
According to the RBI notification:
‘The collateral cover, as applicable, shall be maintained on an ongoing basis and the facility agreements shall have explicit provisions for margin calls in the event of shortfalls.’
What Can Be Used as Collateral?
The RBI has specified that collateral may include:
- Eligible securities
- Cash and cash equivalents
- Permissible financial assets
- Immovable property
- Receivables
- Bank guarantees
- Standby letters of credit
However, Commercial Papers and Non-Convertible Debentures with an original maturity of up to one year are not allowed as collateral.
What Activities Can Banks Fund?
Banks can continue lending to brokers and capital market intermediaries for, day-to-day operational requirements, financing margin trading activities, market making in equity and debt securities…
Market making plays a key role in ensuring liquidity by providing continuous buy and sell quotes in securities. Banks may also issue guarantees on behalf of brokers in favour of exchanges or clearing corporations. These guarantees must be backed by at least 50% collateral, with 25% in cash.
Restrictions on Proprietary Trading
The RBI has clarified that banks cannot fund brokers for buying securities on their own account, including proprietary trading or investments. Exceptions are allowed only in specific cases such as:
- Market making in equity and debt
- Warehousing of debt securities
Even where guarantees are permitted for proprietary trading, they must be fully secured, with at least 50% of collateral in cash or cash equivalents.
Higher Cap for Acquisition Financing
In another significant move, the RBI has increased the limit for banks funding takeovers and acquisitions.
Earlier draft norms had proposed a cap of 10% of a bank’s Tier-1 capital for acquisition financing. The final guidelines have doubled this limit to 20%.
The RBI stated that several stakeholders had requested a higher cap, and the recommendation was accepted.
Additionally, banks can now finance up to 75% of the acquisition value, compared to 70% proposed in the draft rules.
This change is expected to open up more opportunities for banks in the mergers and acquisitions space, especially at a time when companies are increasingly raising funds through capital markets and non-bank channels.
Why This Matters for Market Participants
The new framework strengthens risk controls around bank exposure to capital market intermediaries. Full collateralisation reduces systemic risk and improves transparency in funding arrangements.
At the same time, higher acquisition financing limits may support deal activity and corporate restructuring.
For brokers and intermediaries, the emphasis now shifts to stronger collateral management and liquidity planning. For investors, tighter funding norms improve overall financial system stability.
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