RBI Overhauls Bank Lending: New Capital Market Norms 2026

A New Regulatory Framework for Bank Lending

The Reserve Bank of India (RBI) has issued the Commercial Banks – Credit Facilities Amendment Directions, 2026, marking a significant overhaul of how banks extend credit to capital market participants. Effective from April 1, 2026, these new regulations aim to strengthen the resilience of the banking sector by mitigating concentration risk and curbing excessive leverage in high-volatility exposures. The amendments follow a consultation process that began with draft directions released in October 2025, signaling a deliberate move towards a more principle-based and risk-sensitive supervisory framework.

Stricter Norms for Broker Funding

A central component of the new rules is the mandate that all credit facilities provided to SEBI-regulated stockbrokers and other capital market intermediaries (CMIs) must be fully secured. This eliminates the practice of extending credit based on partial or promoter-only guarantees. The collateral for such loans can include cash, government securities, or other approved financial assets. This change forces a more disciplined approach to lending, ensuring that credit extended to the brokerage industry is backed by tangible and high-quality assets, thereby reducing the risk to the lending bank.

Bank Guarantees and Proprietary Trading

The RBI has also tightened the requirements for bank guarantees issued in favor of stock exchanges or clearing houses. These guarantees must now be backed by a minimum of 50% collateral, with at least half of that collateral (25% of the total guarantee value) being in cash. Furthermore, the amendments explicitly prohibit banks from providing any funding for proprietary trading activities conducted by brokers. While financing for legitimate market-making activities and short-term warehousing of debt securities is still permitted, the move is designed to prevent banks from indirectly financing speculative trading on brokers' own accounts.

Redefined Capital Market Exposure (CME) Limits

The new framework establishes clear, system-level caps on a bank's total exposure to the capital markets. A bank's aggregate capital market exposure, which includes both direct and indirect exposures, is now capped at 40% of its Tier 1 capital. Within this overall ceiling, direct exposure—such as investments in equities, underwriting commitments, and acquisition financing—is restricted to 20% of Tier 1 capital. By linking these limits to Tier 1 capital, the RBI ensures that a bank's market-related risk-taking is directly proportional to its core financial strength and loss-absorbing capacity.

A New Frontier: Regulated Acquisition Finance

For the first time, the RBI has created a formal framework allowing banks to participate in acquisition financing, an area historically dominated by NBFCs and private credit funds. However, this participation comes with strict prudential guardrails. Acquisition finance is given a specific sub-limit, capped at 20% of the bank's overall CME limit. Banks can fund up to 70% of a deal's value, requiring the acquiring company to contribute at least 30% as equity. This financing is available only to listed companies with a proven three-year profit track record, preventing highly leveraged takeovers by financially weak entities.

Revised Loan-to-Value Ratios for Securities

The RBI has also updated the rules for loans extended against the collateral of capital market securities, affecting both retail and institutional borrowers. The loan-to-value (LTV) ratios have been differentiated based on the risk profile of the underlying asset.

These standardized LTVs provide clarity and are designed to ensure that an adequate margin of safety is maintained against potential price volatility in the collateral.

Standardized Haircuts on Collateral for CMIs

To ensure prudent valuation of collateral accepted from Capital Market Intermediaries, the RBI has specified minimum haircuts. Equity shares, being more volatile, will attract a significant 40% haircut, meaning their value is reduced by that percentage for collateral purposes. This measure ensures that banks are adequately protected against sharp market downturns.

Impact on the Banking Sector

The new regulations will compel banks, particularly large private and foreign banks with significant capital market operations, to recalibrate their lending strategies. They will need to enhance their internal risk management, valuation, and monitoring systems to comply with the new framework. While the caps on high-margin activities like acquisition finance might temper short-term profitability, the long-term effect is expected to be a more stable and resilient banking system, better insulated from capital market shocks.

Implications for Corporates and Investors

For corporations, the new rules may make it more challenging to secure funding for highly leveraged acquisitions. However, financially sound companies will benefit from a more transparent and structured financing route through banks. For the broader market, these regulations are expected to promote greater stability by discouraging excessive speculation funded by borrowed capital. Individual investors will face standardized LTVs and a general lending cap of ₹1 crore per person against eligible assets.

Strategic Exemptions for Systemic Stability

Recognizing the importance of supporting critical financial infrastructure, the RBI has exempted certain investments from the CME limits. These include investments in systemically important entities like the Life Insurance Corporation of India (LIC), National Payments Corporation of India (NPCI), and major stock exchanges (NSE, BSE). Additionally, investments in non-convertible bonds and shares pledged for infrastructure projects executed through Special Purpose Vehicles (SPVs) are also excluded, ensuring that these essential capital flows are not constrained.

Conclusion: A Framework for Prudential Growth

The RBI's comprehensive amendments represent a shift from a fragmented set of circulars to a unified, risk-based framework for capital market lending. The message is clear: the central bank is fostering a financial environment that supports growth and innovation while enforcing strict discipline. By establishing clear prudential guardrails, the RBI aims to ensure that the next phase of India's capital market evolution is built on a foundation of stability, transparency, and responsible risk management.