India's central bank introduces comprehensive capital market lending rules to reshape banking sector

The Reserve Bank of India has proposed a detailed overhaul of lending and exposure regulations for commercial banks, aiming to foster a more structured and market-led financial system from April 2026.

India’s central bank used an October 2025 consultation paper to do more than tighten a few lending limits: it sketched a single rulebook for how commercial banks can finance share-backed borrowing, market intermediaries and corporate takeovers. The draft Reserve Bank of India (Commercial Banks – Capital Market Exposure) Directions, 2025 was issued as part of the RBI’s wider developmental and regulatory policy package, with the consultation window running until 21 November 2025. In the version circulated for comment, the RBI said the framework would take effect from 1 April 2026, or earlier if a bank adopted it in full. ETBFSI described the move as a broader reset in the way banks engage with capital markets, rather than a narrow tweak to lending rules. (business-standard.com)

At the centre of the draft is a new capital-based architecture for exposure limits. Aggregate capital market exposure would be capped at 40 per cent of Tier 1 capital on both a solo and consolidated basis, while direct exposure, covering investment positions and acquisition finance, would be limited to 20 per cent. The RBI also proposed a further ceiling inside that structure: a bank’s total acquisition-finance book could not exceed 10 per cent of Tier 1 capital. Business Standard reported that banks would have to create separate sub-limits for intra-day exposures to individual counterparties and in aggregate, while Reuters noted that the proposal followed the RBI’s earlier decision to ease restrictions on merger-and-acquisition funding. (rbi.org.in)

The draft is unusually specific about what can and cannot sit behind these loans. Eligible securities would include listed Group 1 equity shares, government securities including Treasury Bills and Sovereign Gold Bonds, listed debt rated BBB or above, commercial paper and non-convertible debentures with original maturity of up to one year, listed or redeemable mutual fund units, non-commodity exchange traded funds, and units of REITs and InvITs. For listed shares and fund units, banks would have to value collateral at the lower of the previous trading day’s price or net asset value and the six-month average. At the same time, the RBI carved several exposures out of the headline CME ceiling, including debt mutual funds, non-convertible bonds and debentures, certificates of deposit issued by other banks, and preference shares without voting rights. (rbi.org.in)

Retail lending rules would also be recast in a more granular way. The RBI set ceiling loan-to-value ratios of 60 per cent for listed shares and listed convertible debt, 75 per cent for non-debt mutual funds, ETFs and REIT or InvIT units, and up to 85 per cent for debt mutual funds and AAA-rated debt; lower-rated listed debt and commercial paper would attract tighter terms. Any breach would have to be corrected immediately and no later than seven working days, while debt collateral downgraded below BBB(-) would have to be replaced, or the exposure partly repaid, within 30 working days. KPMG’s implementation note and the Mondaq legal analysis both highlighted an important distinction that is easy to miss: individuals could borrow up to INR1 crore against most eligible securities, but only INR25 lakh could be used for buying securities in the secondary market, and IPO, FPO and ESOP loans would remain capped at INR25 lakh with a minimum 25 per cent cash margin. The draft also barred a bank from financing its own staff or employee trusts to buy that bank’s shares. (rbi.org.in)

For brokers, custodians and other capital market intermediaries, the RBI proposed a regime that is permissive on operating finance but strict on use and collateral. Banks could extend need-based working capital, margin-trading finance, settlement-related overdrafts and market-making lines, but only to intermediaries regulated by a financial-sector authority and only where the collateral belongs to the borrower. The draft expressly ruled out financing securities acquisition, proprietary trading or investment books of these intermediaries. It also imposed haircut schedules that run from 40 per cent for listed equities and listed convertible debt to 15 per cent for debt mutual funds, AAA debt and A1-rated commercial paper. Mondaq noted that these exposures would also have to fit within the RBI’s wider large-exposure and intra-group rules. (rbi.org.in)

The consultation paper also pulled some obscure but important activities into the same prudential net. Irrevocable Payment Commitments issued by custodian banks for mutual funds and foreign portfolio investors would be treated as financial guarantees, with exposure counted at 30 per cent for intraday positions and 50 per cent for overnight positions, net of post-haircut margins. For non-financial corporate borrowers, the RBI said banks could lend against eligible securities for working capital or other “productive purposes”, and could extend bridge finance against securities already held by the borrower for promoter stakes in new companies. Those bridge loans would need a firm repayment plan within one year of first disbursal, and banks would have to ensure the money was not diverted into speculation. (rbi.org.in)

The most consequential shift, however, is in takeover finance. The RBI proposed letting banks fund Indian corporates buying controlling stakes in domestic or foreign companies, provided the borrower is a listed company with satisfactory net worth and three years of profits, the target has three years of annual returns available, and the deal is backed by two independent valuations. Bank funding would be capped at 70 per cent of acquisition value, with the acquirer contributing at least 30 per cent in equity from its own funds. Credit appraisal would have to be based on the combined balance sheet of buyer and target, and post-acquisition leverage could not exceed 3:1. Reuters said the measure would open a business line that had been largely outside the reach of domestic banks, while the RBI draft insisted on full security over the target’s shares and ongoing stress testing of the loan book. (rbi.org.in)

Just as important as the new limits is the regulatory clean-up around them. KPMG said the draft applies to commercial banks but excludes small finance banks, regional rural banks, local area banks and payment banks. Mondaq highlighted a fresh disclosure requirement, under which banks would have to report the aggregate outstanding amount of all credit facilities permitted by the directions in the notes to their balance sheets. And the RBI proposed to repeal 50 older circulars, stretching from 24 October 1986 to 27 September 2010, replacing a patchwork of rules on advances against shares, bridge loans, margin trading, PSU disinvestment finance and employee share purchases with a single framework. That is why the draft matters: it is not only a cap on risk, but a rewrite of the terms on which Indian banks are allowed to support a deeper, more market-led financial system. (assets.kpmg.com)