Module: General Practice
Q11: Consider the following statements regarding bank exposure to capital market intermediaries:
Statement 1: The RBI strictly regulates commercial bank exposure to the capital market to ring-fence depositors' funds from inherent stock market volatility.
Statement 2: The latest Credit Facilities Amendment Directions, 2026, tighten lending norms by revising the collateral requirements for advances granted to share and stockbrokers.
Statement 3: The amendment explicitly mandates that banks must now obtain a strict 100% margin/collateral when providing funding to brokers for margin trading.
Statement 4: Out of the mandated 100% collateral, at least 50% must strictly be in the form of cash or cash equivalents like fixed deposits.
Which of the above statements is/are correct?
Statement 2: The latest Credit Facilities Amendment Directions, 2026, tighten lending norms by revising the collateral requirements for advances granted to share and stockbrokers.
Statement 3: The amendment explicitly mandates that banks must now obtain a strict 100% margin/collateral when providing funding to brokers for margin trading.
Statement 4: Out of the mandated 100% collateral, at least 50% must strictly be in the form of cash or cash equivalents like fixed deposits.
Which of the above statements is/are correct?
✅ Correct Answer: D
🎯 Quick Answer:
All statements are correct. (Option D)Brokers use bank funds to offer margin trading to retail clients.
If the market crashes and clients default, the broker defaults, eventually putting the bank's depositors at risk.
Structural Breakdown: To mitigate this, the RBI uses two tools: qualitative restrictions on what the loan can be used for, and quantitative margins (collateral) to ensure the loan is always over-secured.
Historical / Static Context: Under the overarching Capital Market Exposure (CME) guidelines, banks have always been required to take collateral from brokers.
However, the quality and percentage of this collateral varied, sometimes leading to systemic risks during market flash crashes.
The Dynamic Update (NEW) & Data: The February 2026 amendment qualitatively tightens broker financing by redefining acceptable collateral (Statement 2). The hard data tested is the aggressive new requirement: a 100% margin is now mandatory for broker funding (Statement 3), and to ensure extreme liquidity, 50% of this collateral must be in hard cash or fixed deposits, rejecting illiquid shares as sole backing (Statement 4).