Reserve Bank of India (RBI) has tightened norms for banks’ loans to brokers and capital market intermediaries (CMIs) to improve transparency and curb leverage.

• Market reaction to the announcement:

  • BSE shares fell 7.5%.

  • Angel One declined 5%.

  • Groww fell 1.7%.

  • New rules take effect April 1.

• Key features of RBI’s new rules:

  • All bank credit to brokers/CMIs must be fully secured with 100% collateral.

  • Loan-to-value (LTV) ratios are now standardised.

  • Banks can lend to individuals against securities with:

    • 60% LTV for listed shares and listed convertible debt.

    • 75% LTV for mutual funds (excluding debt MFs), ETFs, REITs and InvITs.

  • Earlier LTV norms were flexible and varied widely across products.

• Margin Trading Facility (MTF):

  • Banks can lend to brokers for MTF books only against 100% collateral.

  • Brokers currently fund most MTF books via commercial paper borrowings.

• Expected impact on the industry:

  • Proprietary trading desks face the biggest hit due to higher collateral needs.

  • Margin for bank guarantees (BGs) may rise from 50% to 100%, sharply reducing leverage.

  • Proprietary trading accounts for ~50% of options volumes and ~30% of cash and futures volumes.

• Impact on intraday trading:

  • Brokers must now provide 100% collateral for intraday borrowings, with 50% in cash.

  • Funding costs rise, forcing brokers to either cut client leverage or lock in more capital.

• Views from Zerodha:

  • Retail brokers offering intraday leverage will be significantly affected.

  • Independent brokers may see profitability pressure due to higher funding costs.

• MTF impact split:

  • Bank-owned brokers less affected, as parent banks can provide capital internally.

  • Independent brokers face margin pressure if borrowing costs increase.

• Analyst view (JM Financial):

  • With 100% collateral norms, the bank funding channel becomes unattractive, likely limited to short-term mismatches.

• Impact on trading volumes:

  • Limited effect expected on cash market volumes or retail clients.

  • Combined impact of RBI rules and higher STT could reduce options volumes by 15–20%.