The Collateral Cover Must Be Maintained on an Ongoing Basis: RBI Tightens Lending Norms for Capital Market Intermediaries

The Collateral Cover Must Be Maintained on an Ongoing Basis: RBI Tightens Lending Norms for Capital Market Intermediaries

(Effective from April 1 )

The Reserve Bank of India (RBI) has introduced stricter prudential norms governing bank lending to Capital Market Intermediaries (CMIs) such as stockbrokers and clearing members. The move aims to strengthen systemic stability, enhance risk management, and ensure that banks’ exposure to capital market activities remains well-secured.

All Credit Facilities to CMIs Must Be Fully Secured

Under the revised guidelines, all credit facilities extended by banks to CMIs must be provided on a fully secured basis. In practical terms, this means:

· A ₹100 loan must be backed by ₹100 worth of eligible collateral

· Partial or unsecured lending to CMIs is no longer permitted

· Earlier, full collateralisation of the entire loan amount was not mandatory

This marks a significant shift in the regulatory approach, reflecting RBI’s emphasis on credit discipline and prudential safeguards.

What Qualifies as Acceptable Collateral?

The RBI has clearly defined what banks may accept as collateral. Permissible forms include:

· Eligible securities

· Cash and permissible financial assets

· Immovable property

· Receivables

· Bank guarantees

· Standby letters of credit

❌ Not acceptable as collateral:

· Commercial Papers (CPs)

· Non-Convertible Debentures (NCDs) with original or initial maturity of up to one year

This exclusion is aimed at avoiding short-term, higher-risk instruments being used as security.

Ongoing Collateral Maintenance & Margin Calls

A key highlight of the new framework is the emphasis on continuous collateral adequacy:

“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.”

This means:

· Banks must monitor collateral values continuously

· Facility agreements must clearly provide for margin calls

· CMIs must promptly top up collateral in case of valuation shortfalls

Permissible Lending Activities to CMIs

Banks are allowed to lend to brokers and other CMIs for legitimate operational needs, including:

· Day-to-day operational requirements

· Financing of margin trading by stockbrokers

· Market making in equity and debt securities

Market making plays a crucial role in ensuring liquidity, enabling smooth buying and selling of securities without inventory bottlenecks.

Bank Guarantees: Conditions Tightened

Banks may issue guarantees on behalf of CMIs in favour of stock exchanges or clearing corporations, subject to:

· Minimum 50% collateral cover

· At least 25% of the collateral must be in cash

For guarantees related to proprietary trading:

· 100% collateralisation is required

· At least 50% must be cash or cash equivalents, including government securities

Restrictions on Use of Bank Funds

The RBI has reiterated that banks cannot lend to CMIs for:

· Purchase of securities for proprietary trading

· Investments on the intermediary’s own account

 Exceptions apply only in limited cases such as:

· Market making in equity and debt markets

· Warehousing of debt securities

Higher Limits for Acquisition Financing

In another major regulatory update, the RBI has enhanced banks’ ability to fund acquisitions:

· Acquisition financing limit raised to 20% of Tier-1 capital

· Earlier draft (October 2025) had proposed a 10% cap

· Banks can now finance up to 75% of acquisition value, up from 70%

This change follows industry feedback and opens up new growth opportunities for banks, especially at a time when companies are increasingly relying on capital markets and non-bank funding sources.

Conclusion

The RBI’s revised framework reflects a careful balance between market development and risk containment. By mandating full collateralisation, ongoing collateral monitoring, and tighter margin requirements, the regulator has reinforced the safety of bank lending to capital market intermediaries while still allowing space for essential market activities such as margin trading and market making.

For banks, brokers, and compliance professionals, these norms call for robust documentation, vigilant collateral management, and strong internal controls as the new rules come into force from April 1.

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#MarginCalls #IndianBanking #FinancialRegulation #StockBrokers

#MarketMaking #ComplianceUpdate