RBI’s new lending rules: Nitin Kamath explains what changes for brokers and traders

The recent tightening of lending norms by the Reserve Bank of India for capital market participants has raised some concerns among brokerages. Zerodha co-founder Nitin Kamath said the changes are significant but will not affect their customers.

In a detailed post on X, Kamath said the industry is still interpreting the RBI circular, but the broad direction is that funds for brokers and proprietary traders will become more expensive from April 1.

“We are trying to understand RBI’s new lending rules for brokers,” Kamath wrote, adding that he had spoken to industry participants to gauge the implications. Although “nothing has changed for any of our customers” at Zerodha, he said, “a little bit” is changing.

The RBI on Friday issued revised norms governing banks’ exposure to capital market entities. The changes include a ban on bank funding for proprietary trading by brokers, stricter collateral requirements for bank guarantees issued in favor of exchanges and clearing corporations, and a shift towards a fully secured funding structure.

Proprietary trading, where brokers trade on behalf of clients using their own capital, is a large part of the derivatives ecosystem. According to Jefferies, prop trading accounts for around 50% of equity options premium turnover. Any disruption in funding for such desks could therefore change the liquidity dynamics of the market.

Kamath explained how bank funds were structured earlier. Prop Desk Rs. 50 crore as fixed deposit and Rs. 100 crore will get bank guarantee. This guarantee will then be used to meet margin requirements with the clearing corporation, effectively allowing 2x leverage. “It has now completely stopped,” he said, referring to the RBI’s express ban on lending to proprietary trading.

The regulator has clarified that banks cannot fund prop trading activities except for limited functions such as market making and certain debt warehousing roles. All such exposures will now be treated as capital market exposures, i.e. they will count towards banks’ overall limits for this category. This may further curb the appetite of banks to extend credit to the trading ecosystem.

Another major change relates to Professional Clearing Members or PCMs. These institutions expressly trade on behalf of brokers and previously enjoyed relatively low collateral requirements when seeking bank guarantees. Kamath noted that the PCM had earlier received Rs. 100 required to provide only 25% collateral to obtain a bank guarantee, while other intermediaries had to provide 50%. That preferential structure has now been removed.

“PCMs also require 50% collateral going forward,” said Kamath. This will increase clearing costs for brokers who rely on PCM instead of being self-clearing members.

Zerodha, he pointed out, clears its business directly in the segment and is not dependent on external financing. “We have 0 external borrowings, and we are a self-clearing member, so our charges to clients will also be unaffected,” he wrote.

Bank guarantees issued in favor of exchanges or clearing corporations will require a minimum of 50% collateral, of which at least 25% must be in cash. Equity shares used as collateral will be subject to a haircut of at least 40%, reducing their effective value for margin purposes.

Kamath also outlined the implications for retail traders using leveraged products. Intraday funding will become more expensive due to the new 100% collateral requirement, up from 50% earlier. Margin trading facility financing, commonly known as MTF, is also likely to cost more as banks will now require 100% collateral, with at least half in cash or cash equivalents.

“Costs are increasing across the board for brokerage, and this may or may not be passed on to you, the customer,” Kamath said.