Brokerages May Tap Bonds and Commercial Papers as Bank Funding Turns Unsuitable
As the landscape of financial borrowing shifts under new regulations, brokerages are looking toward bonds and commercial papers (CPs) to sustain their operations. This necessity arises due to recent guidelines released by the Reserve Bank of India (RBI), which alter the funding dynamics for capital market intermediaries.
The Shift to Bonds and CPs
– New RBI Guidelines: Effective April 1, 2026, the RBI mandates that all borrowing for capital market intermediaries must be backed by 100% collateral, with at least 50% required in cash for various facilities. This shift renders traditional bank funding less viable for most equity brokers.
– Impact on the Industry: Analysts suggest that these changes could strain the profitability of the brokerage sector. With the increase in required capital and collateral, brokers may need to divert their financing strategies toward bonds and CPs, potentially increasing their funding costs.
– Liquidity Concerns: The new funding framework also limits banks’ ability to support leveraged trading in equity and derivative markets. This constraint might cause a ripple effect, leading to reduced market liquidity and productivity.
Cost Implications for Brokerages
– Increased Funding Costs: The tightening of collateral requirements will likely result in higher borrowing costs. This change is set to compress margins and diminish returns on equity, with proprietary traders—who contribute 30-50% of market volumes—predicted to be the hardest hit.
– Mandatory Haircuts on Collateral: The revised rules raise the haircut on equity collateral to at least 40%, up from approximately 25%. For other asset classes, haircuts apply as follows:
– ETFs/REITs/InvITs: 25%
– Debt Securities: 15-40%, depending on rating
Brokers Adjusting Strategies
Brokerages that have relied heavily on traditional bank lines for margin trading facilities (MTF) or working capital will need to adapt significantly. For instance:
– Angel One: This brokerage has historically raised substantial capital; approximately ₹3,400 crore in FY25. However, it will have to increasingly turn to CPs, non-convertible debentures (NCDs), and borrowing from non-banking financial companies (NBFCs).
– Groww: Mainly equity-funded, Groww plans to seek market borrowings as its MTF book grows rapidly.
Conclusion: Navigating New Waters
The RBI’s updated guidelines on capital market funding are set to transform how brokerages operate financially. As bank funding becomes unsuitable under the new collateral requirements, equity brokers are likely to turn to bonds and commercial papers to navigate these challenges. While this transition may incur higher costs and tighter liquidity, it also presents an opportunity for market participants to explore alternative financing avenues.
In summary, the landscape is changing, and as brokers adapt to these new realities, the move toward bonds and CPs could redefine the operational strategies within the equity trading sector.