By Kushan Shah
The Reserve Bank of India’s (RBI) latest guidelines restricting bank funding to brokers led to a sharp decline in stock broking firms’ share prices on Monday. Big listed brokerage such as, Angel One, Anand Rathi, Motilal Oswal Financial Services, Groww as well as well as the Bombay Stock Exchange (BSE) fell between 2.74% to 9.88% intra-day.
End of Leveraged Proprietary Desks
The RBI in its recent mandate said that banks need to have 100% collateral for providing funding to brokers while limiting their total exposure to 40% of its tier 1 capital. Along with this, the bank funding for proprietary trading by brokers has also been prohibited. Given that proprietary trading constituted about 30% of the participation in cash and futures market and close to 50% in the equity options segment as of December 2025, this move is expected to hit overall volumes.
In addition, the collateral requirements have also been made stricter with the haircut on equity collateral increasing from 25% to 40% and stricter standards on collateral used for bank guarantees to exchanges or clearing houses.
Experts believe the regulations will impact near-term volumes and leverage. According to Devesh Agarwal, Vice President, IIFL Capital Services, the ban on lending for proprietary trading will reduce leverage and make these positions more expensive and capital-intensive.
He added that along with the hike in the securities transaction tax (STT), these new rules can reduce profit margins for short-horizon, high turnover strategies as they will reduce turnover and risk-taking by brokers.
Collateral Squeeze
Agarwal anticipates a 10-15% impact on volumes and cites concerns like scaling back of operations by proprietary traders and a possible shift towards low frequency strategies or other instruments with lower regulatory restrictions due to the regulations.
Market expert Arun Kejriwal believes that the regulations will tighten the gap between banks and brokers, as the investors who could not borrow from banks but leveraged investments through brokers will not be able to do so.
Additionally, pyramiding of positions by buying shares with pledged shares will also be prevented. Kejriwal thinks these regulations are good in the long term although they may impact trading volumes in the short term and lead to unwinding of leveraged positions.
Both the market regulator and the government have been worried in recent times about the rising retail participation in the futures and options market. While the Securities and Exchange Board of India has tightened guidelines, including increasing margins, the retail enthusiasm has continued unabated.
According to data from the exchanges, the average daily F&O turnover (premium) spiked in January. NSE’s turnover touched a 15-month high of Rs 2.47 lakh crore and BSE’s was the highest ever at Rs 29,093 crore.
The latest RBI regulations, along with the recent hike in STT), are expected to reduce excessive leverage, risk-taking and speculative lending in the derivatives markets.