The Reserve Bank of India (RBI) has revised regulations governing the exposure of scheduled commercial banks to capital markets. There can be no mistaking the context here — namely, the rampant increase in leveraged equity derivatives trading since the pandemic. Exposure of private sector banks to capital markets has grown at a compounded annual growth rate (CAGR) of 19.3 per cent between FY20 and FY25. Even PSU banks have grown their lending to this segment at a CAGR of 15.6 per cent in this period.
While private banks’ lending to capital markets stood at ₹1,91,945 crore as on March 2025, the exposure of PSU banks was ₹87,924 crore. This trend cannot be overlooked for its potential impact on banks’ stability. Not surprisingly, RBI is trying to restrain banks from ramping up their exposure. It has said that scheduled commercial banks should not finance buying of shares or trading by stockbrokers on their proprietary accounts. They are allowed to provide guarantees for proprietary trading, provided it is 100 per cent backed by collateral, 50 per cent of which should be in cash. There shall be strict monitoring of the collateral. RBI has also laid down the haircuts which should apply to securities given as collateral. These steps will help rein in banks’ capital market exposure along with the galloping trading volumes.
The number of contracts traded in the equity derivative segment of the NSE has surged from 512 crore in FY20 to 10,329 crore in FY25, clocking a CAGR of 82 per cent annually. Proprietary trading by stockbrokers has been leading this surge in volumes, accounting for over 60 per cent of the derivatives trading and about one-third of the cash volumes on exchanges. The RBI has, however, been prudent; it did not clamp down on the entire broking industry. Instead, it has provided brokers with a lifeline, saying that banks can provide credit to finance their day-to-day operations, which include working capital facilities and finance for margin trading provided to clients, and to help them meet mismatches in settlement. Therefore, clients of brokers will not face a paucity of funds and the client-facing business of brokers will not suffer.
Yet, stockbrokers’ bodies have urged a rollback of the RBI rules, citing a potential hit to market liquidity and volumes. This is notwithstanding the fact that the Securities and Exchange Board of India has been concerned about equity derivatives trading, and since 2024 has come out with regulations to control speculation and protect smaller investors. So, the RBI is undoubtedly justified in imposing the latest lending curbs. Larger brokers who primarily concentrate on client servicing are unlikely to be impacted. Everyday operations of stockbrokers will be unaffected. Smaller brokers may struggle to give 100 per cent collateral for obtaining bank guarantees, and may have to reduce their trading activity. Fact is, some reduction in market volume is good for the well-being of the market, and for financial stability.
Published on February 20, 2026