Policy Context and Objectives
The Reserve Bank of India has issued draft “Commercial Banks – Capital Market Exposure (CME) Directions, 2025” proposing consolidated, risk-sensitive limits on banks’ direct and aggregate exposures to capital markets, with phased implementation envisaged from April 1, 2026 subject to finalisation.
The draft CME framework seeks to rationalise and unify disparate circulars governing banks’ lending and investment to the capital markets, aligning prudential limits with market developments while enabling acquisition finance and calibrated retail participation. RBI’s intent is to strengthen financial stability by mitigating concentration and volatility risks through explicit ceilings and purpose-specific controls.
Scope and Definitions
Capital Market Exposure encompasses both direct exposures (investments and acquisition finance) and indirect exposures (credit such as loans against securities and financing to market intermediaries). The Directions apply to commercial banks, with parallel drafts issued for Small Finance Banks; RBI has initiated public consultation on the package.
Prudential Ceilings
Aggregate CME of a bank on solo and consolidated bases shall not exceed 40% of Tier 1 capital as of March 31 of the preceding financial year, to be maintained on an ongoing basis. Within the overall ceiling, direct CME—comprising investments and acquisition finance—shall not exceed 20% of Tier 1 capital. Banks must institute sub-limits for intra-day exposures both at counterparty and aggregate levels to manage liquidity and market risks.
Acquisition Finance: Calibrated Liberalisation
Banks may finance up to 70% of deal value in corporate acquisitions, with acquirer contribution of at least 30% equity from own sources. Eligibility is limited to listed companies with sound financials and SEBI-compliant independent valuation. The total acquisition finance exposure must remain within direct CME and internal concentration controls.
Retail and Non-Individual Lending Contours
For individuals, the draft raises permissible loan limits for capital market purposes up to ₹1 crore per borrower, including sub-limits such as ₹25 lakh for secondary market purchases or IPO/FPO/ESOP financing, subject to margin and LTV requirements.
For non-individuals, banks may extend working capital or bridge finance against eligible securities, excluding lending against their own shares, partly paid or locked-in securities, and buyback financing.
Eligible Collateral, LTVs and Exclusions
Loans must be secured by approved securities such as listed shares, bonds, and mutual funds. Indicative LTV caps include:
• 60% for shares
• 75% for non-debt mutual funds/ETFs
• Up to 85% for debt mutual funds/top-rated bonds
Governance, Monitoring and Implementation
Banks should integrate CME ceilings within Board-approved risk frameworks, ensuring monitoring at both solo and consolidated levels. The draft proposes effect from April 1, 2026 (or earlier if adopted sooner), with public comments invited during consultation.
Practical Implications for Banks
• Tier 1-linked caps align exposure growth with capital accretion.
• Product programs like LAS and acquisition finance must include eligibility screening, valuation controls, and real-time exposure tracking.
• Banks must redesign retail products to adhere to sub-limits and LTV norms.
Compliance Checklist
• Map all CME lines to Tier 1-based caps with real-time MIS alerts.
• Update policies on eligibility, valuation, collateralisation, and concentration.
• Set intra-day exposure sub-limits and stress-testing mechanisms.
• Redesign retail products per borrower and purpose-based limits.
Key Takeaways
The draft CME Directions prescribe capital-linked ceilings—20% for direct and 40% for aggregate exposures—with emphasis on acquisition finance and retail leverage management. Banks and market participants should align systems and policies before the April 1, 2026 implementation date.
