“This also has a deep-rooted impact on healthy competition in the stock broking industry and affected most mid-sized broking houses,” the letter said.
The central bank in May instructed banks that intra-day credits to stockbrokers have to be backed by a minimum margin of 50% in the form of fixed deposits and marketable securities. So, a broker needing ₹500 crore as intra-day funds must cough up at least ₹250 crore as collateral to the lending bank.
Until recently, intra-day funds to brokers by banks were not considered ‘loans’. It largely remained a grey area as neither banks categorised it as capital market exposure nor the central bank insisted on it. Banks extended the facility without any collateral to brokers based on their risk profile, track record, and relationships.
Stock brokers require intra-day funding facilities from banks to meet temporary requirements like pay-in of exchange obligations, executing trades under custodial participant codes of their clients and intraday margin requirements, among others. Brokers also avail intra-day funding from their bank to place and execute F&O trades on the stock exchange platform.
“Post introduction of upfront margin for all trades, segregation of clients’ collateral and peak margin requirement by Sebi, the risk of default has considerably reduced. So, the new requirement by the RBI is not necessary,” said Kamlesh Shah, president, ANMI.
“Liquidity, depth, and volume will be impacted if the intraday facility is unavailable due to the 50% collateral requirement, which many brokers would find difficult to arrange.”
Brokers said the move could squeeze liquidity as intraday trades account for more than 80% of total volumes both in the cash market and derivatives market.
Trading volumes, especially in the cash segment (shares), have declined in recent months following the tighter margin norms introduced by Sebi in addition to volatility in the markets.
Average daily cash market turnover on both the exchanges has almost halved to 46,490 crore in July 2022 from a high of 8,621 crore in February 2021. Cash market volumes in July are 25% lower than May volumes of 38%.