RBI’s revised bank exposure rules change how brokers fund margin trading, not client leveraging

RBI's new circular on MTF

As brokers digest the Reserve Bank of India's (RBI) revised funding norms, the widely held view among brokerages that margin trading will become tighter or meaningfully costlier may be overstated.

Executives say the latest RBI circular does not alter how Margin Trading Facility (MTF) works for clients, but reshapes how brokers can fund these exposures — reopening a bank-funding route that had effectively been shut. The immediate impact, they argue, is far less dramatic than early reactions to the circular suggested.

Roop Bhootra, Whole-time Director at Anand Rathi Share and Stock Brokers Limited, said the circular should not be read as a regulatory response to runaway MTF growth. “Most large banks were anyway not funding MTF exposure to brokers earlier,” Bhootra said. “So in practical terms, there is no major disruption to how MTF runs.”

Bhootra added that concerns around risk concentration are misplaced. “Single-stock exposure in the MTF book is capped and monitored daily. The MTF framework already has higher margins than derivatives and normal delivery,” he said, noting that the product continues to operate under the Securities and Exchange Board of India (Sebi) and exchange-level reporting norms.

A more detailed defence of the circular came from Ashish Nanda of Kotak Securities, who said the narrative around rising costs misses the structural shift embedded in the RBI move.

“I completely disagree with the understanding that MTF costs will go higher because of this circular. Rather, this circular opens the gate for banks to lend to brokers against MTF exposures. Earlier, banks were not even allowed to fund broker MTF exposure. This is a big positive,” Nanda said.

He emphasised that the impact is confined to the broker–bank relationship, not the client–broker framework. “ The life for the client remains the same because MTF is governed by Sebi. This circular is only opening one more avenue for brokers to fund their MTF Exposures. This is a positive and not a negative,” he said.

Pledge of client securities

Earlier, RBI norms required banks to take a pledge of client securities for MTF lending — a structure brokers say was operationally unworkable in India’s ecosystem. That requirement has now been removed, which allows banks to lend to brokers for MTF positions for the first time, though under strict conditions.

While the circular permits bank funding, Nanda noted that the rules remain tightly framed. “The collateral requirement is still effectively 100 percent, and although banks no longer need to take pledges of client securities in their favour, it is not yet clear which types of collateral — such as specific stocks or cash equivalents — will be accepted. So yes, the door is narrow. But earlier, the door was completely shut,” he said.

Addressing concerns around higher haircuts, a senior broking executive explained that bank funding was largely absent even under earlier norms. “Earlier, even with a 25 percent haircut, nobody was taking money from banks. Now, even at a 40 percent, haircut banks can lend. So it moves from no funding to some funding. That is better than nothing.”

From a broker’s standpoint, the change simply adds an additional funding option. “If bank rates are attractive, brokers may use them. If commercial papers or other sources are cheaper, they will continue with those,” Nanda said. “But saying this is negative or that costs are automatically going up is incorrect.”

Some market participants also argue that MTF exposure remains small in the context of the broader market, limiting any systemic impact. On that reading, MTF users are unlikely to see any immediate change because of this circular.

Others, however, say the renewed debate has resurfaced an older issue — how retail clients use leverage.

Initial industry reactions to the RBI’s tightening had largely focused on derivatives and intraday trading, where leverage is higher and broker balance sheets rely more directly on bank funding. Brokers now argue that margin trading is being incorrectly pulled into that same risk narrative. The latest circular, they say, changes how brokers fund MTF exposures, not how clients use leverage — drawing a clearer distinction between funding pressure in derivatives and the mechanics of margin trading.