RBI's New Funding Norms: Why BSE, Angel One Shares Fell 10%

Introduction: A Sharp Correction in Capital Market Stocks

On February 16, 2026, capital market-related stocks faced intense selling pressure following the Reserve Bank of India's (RBI) announcement of revised norms for bank lending to the sector. The new guidelines, released on February 13 and effective from April 1, 2026, introduce stricter collateral requirements for Capital Market Intermediaries (CMIs), such as stockbrokers. This regulatory shift is aimed at curbing speculative activity but has raised concerns about rising costs and shrinking profit margins for the brokerage industry, leading to a significant market downturn.

The Market's Immediate Reaction

The market response to the RBI's directive was swift and severe. Shares of major exchanges and brokerage houses plummeted as investors began to price in the impact of tighter funding. The Nifty Capital Markets Index fell by as much as 4.3% during intraday trading, starkly underperforming the broader Nifty50 index.

Decoding the RBI's New Directives

The RBI's updated framework fundamentally alters how banks can finance brokers. The most critical changes include a mandate that all credit facilities extended to CMIs must be fully secured with 100% collateral. The rules go further for specific activities:

• Margin Trading Facility (MTF): For MTF funding, at least 50% of the required collateral must be in the form of cash.
• Equity as Collateral: Any equity shares used as collateral will be subject to a minimum 40% haircut, reducing their effective value for borrowing purposes.
• Proprietary Trading: Banks are now explicitly prohibited from providing any financing for brokers' proprietary trading activities.
• Bank Guarantees: Guarantees issued on behalf of brokers must now be backed by a minimum of 50% collateral, of which at least half (25% of the total guarantee) must be cash.

These measures represent a significant tightening from previous practices, where unsecured instruments could partially back guarantees, providing brokers with greater financial flexibility.

Why the New Norms Squeeze Brokers

The new regulations make traditional bank funding significantly less attractive and more costly for brokers. The 100% collateral requirement, combined with the substantial cash component for MTF and a steep haircut on shares, effectively increases the cost of capital. Analysts at JM Financial noted that these conditions would likely push brokers away from banks and towards more expensive funding alternatives like Non-Bank Finance Companies (NBFCs), commercial papers (CPs), and non-convertible debentures (NCDs). This shift is expected to compress margins and reduce the operational flexibility that brokers have relied on for growth, particularly in funding their margin trading books.

Impact on Major Industry Players

The regulatory changes will have a varied but significant impact across the industry. Jefferies estimates that BSE could see its earnings decline by approximately 10%. This is because higher collateral costs are expected to deter proprietary traders, who contribute significantly to options turnover on the exchange. A potential reduction of 50% in proprietary trading volumes could translate directly into a substantial earnings hit for the exchange.

For retail-focused brokers, the challenge lies in funding their large MTF books. Angel One, with an MTF book of ₹6,100 crore, will need to immediately restructure its funding sources, as half of its borrowings previously came from banks. Similarly, Groww, which saw its MTF book expand fourfold to ₹2,300 crore in the third quarter, will now need to tap debt markets to sustain its aggressive growth, despite being primarily equity-funded until now.

A Necessary Shift in Funding Strategies

In response to the new framework, brokerage firms are expected to pivot their funding strategies. Angel One is likely to increase its reliance on NBFCs, where it had ₹800 crore outstanding as of March 2025, and expand its issuance of NCDs and CPs. The firm has already begun this transition, recently placing an NCD worth ₹500 million. This strategic shift, while necessary, will almost certainly lead to higher funding costs compared to the previously available bank credit lines.

The Rationale Behind the RBI's Move

The RBI's decision appears to be part of a broader regulatory effort to de-risk the financial system and reduce excessive speculation in capital markets. By making leverage more expensive and restricting funding for proprietary trading, the central bank aims to enhance financial stability. This move follows a recent increase in the Securities Transaction Tax (STT) on derivatives, signaling a coordinated push by authorities to cool down speculative fervor, particularly in the options market where proprietary firms are major players.

An Opportunity for Banks

While the new rules create headwinds for brokers, they present a structured opportunity for banks. The RBI has simultaneously clarified guidelines for acquisition financing, allowing banks to fund up to 75% of eligible takeover transactions. With clear guardrails, such as capping total capital market exposure at 40% of a bank's capital base, the regulations permit banks to expand into high-yield corporate credit areas like M&A and leveraged buyouts while containing systemic risk. This opens a new avenue for loan growth at a time when traditional lending is moderating.

Conclusion: A New Operating Reality

The RBI's revised norms mark a pivotal moment for India's brokerage industry. The era of cheap, flexible bank funding is ending, forcing firms to adapt to a new reality of higher capital costs and stricter oversight. With the April 1, 2026, deadline looming, brokers have a short window to overhaul their funding arrangements and business models. The long-term effects will likely include a consolidation of the market, reduced leverage, and potentially lower trading volumes, but also a more stable and resilient financial ecosystem.