RBI’s New Credit Rules: What Investors Should Know?

The immediate market reaction showed investor concern. Shares of BSE Ltd fell 7.5%, while brokerage platforms' share prices also saw declines after the announcement. The fall reflects fears of lower trading volumes, higher costs, and weaker profitability for transaction-driven businesses.

What Exactly Has RBI Changed?

The new circular fundamentally alters the relationship between banks and market intermediaries by tightening leverage and enforcing full collateralisation.

Banks must now provide all credit facilities to brokers only on a fully secured basis, meaning 100% collateral coverage is mandatory. Earlier, funding structures allowed more flexibility and lower security buffers.

The regulator also standardised loan-to-value (LTV) ratios for loans against securities:

• 60% LTV against listed shares and listed convertible debt securities
• 75% LTV for mutual funds (excluding debt mutual funds), ETFs, REITs and InvITs

Previously, LTV norms were inconsistent, typically 50% to 70% for mutual funds and up to 80% to 90% for debt mutual funds.

Banks can still fund margin trading facility (MTF) books, but only against 100% collateral. Brokers currently rely heavily on commercial paper borrowings for this business, which will now become less attractive.

The framework also introduces standardised haircuts and continuous collateral monitoring. For equity shares, a minimum haircut of 40% applies. In simple terms, shares worth ₹100 will be considered only ₹60 for lending value.

Restrictions on Bank Guarantees and Proprietary Trading

One of the biggest structural changes is the tightening of bank guarantees (BGs) and leverage-based trading.

Earlier, brokers could deposit 50% funds with banks and obtain BGs up to twice that amount, effectively doubling trading capacity when submitted to clearing corporations.

Now:

• Margin requirement for BGs may rise from 50% to 100%
• At least 50% of collateral must be cash
• Proprietary trading guarantees must be fully secured
• Banks cannot fund proprietary trading positions

This matters because proprietary trading contributes roughly:

• 50% of options volumes
• 30% of cash and futures market volumes

The RBI has effectively removed bank-funded speculative trading from the system.

Who Will Be Hit the Most?

Proprietary traders

Proprietary trading contributes nearly 50% of options volumes and about 30% of cash and futures volumes. Since banks cannot fund such trades anymore, this activity may decline.

Brokers offering intraday leverage

Brokers must now keep 100% collateral, with at least 50% in cash, for intraday borrowing. This increases funding costs. Brokers may either reduce client leverage or lock in more capital.

Independent brokerages

Bank-owned brokers can rely on their parent banks for funding. Independent brokers may face higher funding costs and lower profitability.

Trading Volumes Could Fall

The biggest investor concern relates to trading activity.

With leverage declining and proprietary trading curtailed, derivatives volumes may contract. Analysts estimate:

Options trading volumes could fall by 15% to 20%

Cash market volumes are unlikely to see major disruption, but high-frequency and leveraged strategies will moderate.

This matters because exchanges and brokers earn revenue primarily from transactions. Lower activity means lower earnings growth in the near term.

Why Did RBI Do This?

RBI wants to reduce systemic risk. Over the last few years, trading volumes and retail participation surged, especially in derivatives.

High leverage can worsen volatility during market stress. By enforcing 100% collateral and banning bank-funded proprietary trading, the RBI is trying to protect the banking system from market shocks.

What It Means for Investors in Brokerage & Exchange Stocks

The new rules change how investors should view these businesses.

Transaction-heavy companies may experience earnings pressure due to lower derivatives volumes. Profitability of independent brokers may shrink as capital requirements rise. Exchanges may see temporary revenue moderation because speculative trades reduce.

On the other hand, well-capitalised firms gain an advantage. Strong balance sheets, diversified funding sources and compliance strength become competitive moats.

In effect, the sector may shift from a high-leverage growth model to a stability-focused model.

The Bottom Line

RBI’s 2026 credit framework significantly reduces leverage in India’s capital markets. By mandating 100% collateral, standardising LTV ratios, restricting proprietary trading, and tightening margin funding, the regulator is prioritising systemic safety over short-term liquidity.

For investors, the takeaway is clear:

Near-term earnings for brokerage and exchange stocks may remain under pressure, especially if derivatives volumes fall. But over the long term, a safer financial ecosystem could enhance market stability and attract stronger institutional participation.

In other words, the reforms may hurt trading intensity, yet strengthen the market’s foundation.