RBI Capital Market Exposure Norms: Tighter Bank Lending Rules
Why in the news
RBI’s amended directions on capital market exposure came into force on 1 July 2026 after a deferral from 1 April. They aim to lower the risk that stock market lending poses to banks, and trading volumes on exchanges dipped afterwards.
Key facts
- Notified: 13 February 2026 under the Banking Regulation Act, 1949; a new Chapter XIII A was added to RBI’s Directions.
- Applicability: from 1 July 2026 (the first date was 1 April 2026).
- Purpose: reduce systemic risk to banks.
- Individual limits: loan against shares up to ₹1 crore per person; IPO or secondary-market loans capped at ₹25 lakh.
- Acquisition finance now covers mergers and amalgamations, but only when the aim is control of a non-financial target.
What changed
| Area | Limit or rule |
|---|---|
| Total capital market exposure | 40% of Tier-I capital |
| Direct exposure | 20% of Tier-I capital |
| Credit to intermediaries (CMIs) | Fully secured, 100% collateral |
| Proprietary trading | No bank finance |
| LTV on listed shares | 60% |
| LTV on MF, ETF, REIT, InvIT | 75% |
| LTV on debt mutual funds | 85% |
| Bank guarantees | At least 50% collateral, of which 25% cash |
| Haircut on equity shares | 40% |
| Acquisition finance | Up to 75% of deal value |
| IPO financing margin | Minimum 25% |
Market impact
- Higher collateral raised borrowing cost, so brokers traded less.
- Volumes fell on MCX (about 40%) and on BSE (7-10%); NSE’s proprietary share slipped from 52% to 51.3%.
Key concepts
- Proprietary trading: an institution trading its own funds for profit; market-making is permitted.
- CMI: SEBI-regulated brokers, clearing members, custodians and market makers. Standalone primary dealers and qualified central counterparties are excluded.
- Tier-I capital: equity plus disclosed reserves; Basel III minimum is 6% of RWA (total capital 8%).
- LTV: loan divided by asset value. Pledge shares worth ₹100 at 60% LTV and the loan can be at most ₹60.
- Haircut: a discount on collateral; at 40%, a ₹100 share counts as ₹60.
- Bank guarantee: a bank’s written promise to pay the beneficiary if the applicant defaults.
Static GK
- RBI: set up 1 April 1935 under the RBI Act, 1934; nationalised 1 January 1949; headquartered in Mumbai; Governor Sanjay Malhotra is the 26th Governor (since December 2024).
- MCX: founded 2003, Mumbai, India’s largest commodity derivatives exchange; MD and CEO Praveena Rai; clearing arm MCX-CCL; regulated by SEBI since 2015 after the FMC merger.
Exam angle
- Remember the number pairs: 40/20, 60/75/85, 50/25 and 25.
- Governing law: Banking Regulation Act, 1949.
- Exceptions: market-making allowed; SPDs and QCCPs are not CMIs.