New Delhi: The Reserve Bank of India (RBI) has confirmed it will be enforcing stricter lending norms for stock trading financing from July 1 as they look to discourage unrestricted futures and options(F&O) trading by novice traders.
According to the proposed rules, brands will be prohibited from further fromi lending for proprietary trading and require 100% collateral for other funding to brokers. This could have a direct impact on the stock broking business, with these rules estimated to reduce trading volumes by 20% after implementation.
“Domestic proprietary trading firms fear that their business model has been rendered obsolete,” a spokesperson for a brokerage told Reuters.
This move comes at a time when the RBI has been deeply worried about cheap, borrowed bank money getting channeled into highly volatile derivatives, with nearly 90% of novice traders suffering losses as a result.
Broker Shares Tumble
Following this announcement, brokers like Angel One, Motilal Oswal Financial Services and Nuvama Wealth Management saw their shares decline even as the collective Nifty Capital Markets Index also fell 2.35%. For these brokers, F&O trading has been a core revenue source and they depended on bank financing for their underlying profits. By cutting off this revenue stream, the brokers will now have to find a way to save capital and find alternatives to the massive sources of revenue that came in from F&O trading.
A Short-Term Pain for Long-Term Safety
This development comes at a time when some investors have been looking at the stock market as a gambling den, sometimes prodded by unregistered and unethical online influencers. The SEBI has already put in place stringent measures to curb risky F&O trading, and this move by the RBI is a step in the right direction.
Though investors with a long-term outlook shouldn’t be worried, brokerages will now have to fund a way for alternative sources of income, even as the move has discouraged foreign trading firms from setting up operations in the country.
