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More loans against shares to raise market liquidity but analysts sound a note of caution - BusinessToday

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  Published in Business and Finance on Wednesday, October 1st 2025 at 6:32 GMT by Business Today

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RBI’s New Lending‑Against‑Shares Rule: Boosting Liquidity but Raising Systemic Concerns

On 1 October 2025, the Reserve Bank of India (RBI) announced a set of policy measures aimed at easing the flow of credit to the equity market. At the heart of the initiative is an expansion of “loans against shares” (LAS), a collateralised borrowing arrangement that has long been a staple of India’s capital‑market financing ecosystem. The RBI’s directive allows banks to lend up to 150 % of the market value of eligible securities—a marked increase from the current ceiling of 100 %—with a further relaxation in the types of securities that can qualify as collateral. While the move is hailed by many market participants as a welcome stimulus to liquidity, a chorus of analysts warns that the policy carries hidden risks that could reverberate across the banking system and the broader economy.

1. What the RBI Has Changed

The RBI’s circular, issued in the fourth quarter of 2025, contains three primary adjustments:

1. Higher Loan‑to‑Value (LTV) Ratios
   Banks can now extend loans up to 150 % LTV against shares that are listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) and meet a minimum liquidity threshold of ₹5 crore in the last 12 months. This is a 50 % increase over the current maximum of 100 %.

2. Broader Collateral Spectrum
   Eligible securities now include high‑liquidity mid‑cap stocks, a category that was previously excluded due to concerns over volatility. The RBI has also introduced a risk‑adjusted framework that allows banks to set lower LTVs for more volatile shares, thereby maintaining a buffer against sudden market swings.

3. Extended Loan Tenure and Interest Rates
   The maximum tenor of LAS has been increased from 12 months to 18 months. Moreover, the RBI has reduced the minimum base rate for these loans by 0.25 %, providing a small but meaningful cost advantage for borrowers.

The circular is effective from 15 October 2025, giving banks a 30‑day window to adjust their systems and risk‑management protocols.

2. The RBI’s Rationale

During a press briefing on the same day, RBI Deputy Governor P. Ravi Kumar explained the motivation behind the policy shift:

“We see the equity market as a critical source of long‑term capital. By easing the collateral requirements, we intend to enhance market liquidity, encourage more institutional participation, and help firms tap the equity market for growth financing.”

The RBI’s objective is twofold. First, it seeks to increase the depth of the equity market by allowing investors to leverage their holdings without forcing a sale. Second, it aims to lower the cost of equity‑backed borrowing for firms, thereby supporting corporate expansion and job creation.

The policy is part of a broader set of liquidity‑support measures announced earlier this year, including a temporary cut in the repo rate and a boost in the Standing Repo Facility (SRF) target.

3. Market Reaction

The announcement has elicited a mixed response from market participants. Early in the trading session, the NSE’s Nifty 50 gained 0.7 %, while the BSE Sensex rose 0.6 %—both within normal volatility ranges. However, analysts observed a noticeable uptick in the Volume‑Weighted Average Price (VWAP) of high‑liquidity stocks that are now eligible as collateral.

HDFC Bank Ltd. and ICICI Bank Ltd. were among the first banks to release statements. HDFC Bank’s CEO, Sanjiv Subramanian, stated that the bank expects a 10 % rise in LAS volume over the next quarter. ICICI Bank’s head of Corporate Banking, Radhika Sharma, highlighted the potential for cross‑selling of credit products.

Investors, particularly those holding sizable equity positions, welcomed the policy as a way to monetize their holdings without selling. Yet, the surge in borrowing against equities also raised concerns about the potential for a leverage bubble in the stock market.

4. Analysts’ Cautionary Notes

While the RBI’s objective is laudable, a panel of senior economists and risk analysts expressed reservations about the policy’s implementation. Their key concerns revolve around margin calls, valuation risk, and systemic spillover.

4.1 Margin Calls and Liquidity Crunch

If the value of a borrower’s equity portfolio declines by more than 10 %, banks must meet a margin call to maintain the loan’s LTV ratio. Analysts warn that a sudden market downturn could trigger a wave of margin calls, forcing investors to liquidate positions—potentially adding to downward pressure on share prices.

“Margin calls could amplify market volatility,” said Dr. Anil Mehta, a senior economist at the Institute of Financial Studies (IFS). “We have seen such effects in the past during the 2019 market correction.”

4.2 Valuation and Counterparty Risk

The expansion to include mid‑cap stocks introduces higher valuation risk. Unlike large‑cap names, mid‑cap firms may lack robust disclosure standards and can be more susceptible to price manipulation. Banks will need to develop sophisticated real‑time valuation tools to monitor collateral values.

Ms. Latha Reddy, head of risk at Axis Bank, noted that the bank has already started pilot projects to incorporate AI‑based valuation models that refresh every 15 minutes.

4.3 Systemic Implications

A surge in LAS could increase the exposure of banks to equity markets, which are generally more volatile than fixed‑income instruments. A sudden sell‑off could erode the collateral value across the banking sector, thereby affecting the overall stability of the financial system.

“We need to ensure that the regulatory framework can absorb potential shocks,” cautioned Mr. Rajesh Nair, chief risk officer at the National Bank for Agriculture and Rural Development (NABARD). “The policy should be paired with a robust stress‑testing regime.”

5. The Path Forward

The RBI has outlined a monitoring framework to track the policy’s impact. Banks will be required to report quarterly the volume of LAS disbursed, the average LTV ratio, and the incidence of margin calls. The RBI will publish a mid‑year review in December 2025 to evaluate the policy’s performance and make any necessary adjustments.

In the meantime, market participants are urged to:

1. Reassess Risk Appetite – Investors should conduct stress tests on their portfolios to understand how a decline in equity values would affect collateralised borrowing.
2. Diversify Collateral – Banks may consider mixed collateral arrangements (e.g., combining equities with bonds) to lower exposure to equity volatility.
3. Enhance Valuation Accuracy – Firms and banks should invest in high‑quality valuation tools, especially for mid‑cap stocks.

6. Bottom Line

The RBI’s decision to allow higher loans against shares is a bold step towards deepening India’s equity market and providing firms with flexible financing options. However, the benefits come with a set of risks that cannot be ignored. If managed prudently—with rigorous valuation, timely margin call processes, and robust systemic safeguards—the policy could indeed inject much-needed liquidity into the market without compromising stability. Conversely, if left unchecked, it could precipitate a volatility spiral, undermining the very market it seeks to bolster. As the policy rolls out over the coming months, the eyes of investors, banks, and regulators will remain keenly focused on how the new collateral regime balances growth with prudence.