The Indian stock market witnessed a sharp sell-off in capital market-linked shares on February 16, 2026, following the Reserve Bank of India’s (RBI) sweeping new directive to tighten bank lending to intermediaries. Shares of BSE Ltd plummeted by nearly 10%, while leading brokerage firms like Angel One and Groww saw declines of 5% to 6%, as investors reacted to the potential squeeze on market liquidity and profit margins.
The new framework, titled the Commercial Banks – Credit Facilities Amendment Directions, 2026, is set to take effect on April 1, 2026. Under these rules, the RBI has mandated that all bank credit to stockbrokers and capital market intermediaries must be 100% secured by eligible collateral. This marks a significant departure from current practices where banks often provided flexible, partially secured, or unsecured credit lines to brokers.
A cornerstone of the RBI’s crackdown is the explicit ban on bank funding for proprietary trading. Banks are now strictly prohibited from financing a broker’s own-account investments or trading desks. This move is expected to hit market volumes significantly, as proprietary trading currently accounts for roughly 50% of equity options turnover and 30% of cash market participation.
By cutting off cheap bank capital for these desks, the regulator aims to reduce systemic risk and curb speculative activity that has seen a massive surge in recent years. Analysts at Jefferies estimate that this restriction alone could impact BSE’s earnings by approximately 10% due to lower options turnover.
The new guidelines introduce a “Cash Trap” for bank guarantees (BGs) issued to exchanges for margin requirements. The key financial constraints include:
- 50% Minimum Collateral: Every bank guarantee must be backed by at least 50% tangible collateral.
- 25% Cash Component: At least one-fourth of the total collateral for these guarantees must now be held in hard cash.
- 40% Equity Haircut: Shares pledged as collateral will now face a steeper 40% valuation discount (haircut), up from the previous 25%, drastically reducing a broker’s borrowing power.
Impact on Margin Trading Facility (MTF)
The Margin Trading Facility (MTF), currently a ₹1.1 trillion ($13.2 billion) market, is also under pressure. While banks can still fund MTF for retail clients, the requirement for brokers to maintain 100% collateral—with at least half in cash—makes this business model significantly more capital-intensive.
While these measures may cause short-term volatility and a decline in trading volumes, experts believe they will lead to a more stable, long-term investment environment by de-leveraging the Indian financial ecosystem.
Key Highlights:
- New RBI Norms: Starting April 1, 2026, all bank lending to stockbrokers must be 100% secured, ending the era of unsecured or partially secured bank credit.
- Proprietary Trading Ban: Banks are now prohibited from funding a broker’s own trading desks, a move likely to reduce options and cash market volumes.
- Capital Squeeze: The mandate for 25% cash collateral on bank guarantees and a 40% haircut on equity pledges will significantly increase operational costs for firms like BSE and Angel One.
- Market Reaction: BSE shares crashed 10% and brokerage stocks fell sharply as investors priced in reduced leverage and a potential 10% hit to exchange earnings.