The Reserve Bank of India, through a series of circulars (Nos. 254-262) issued on March 30, 2026, with operational effect from April 1, introduced a comprehensive capital market exposure (CME) framework for commercial banks and small finance banks. The norms cap aggregate capital market exposure at 40% of eligible Tier 1 capital, with direct exposure limited to 20%, and prescribe specific loan-to-value ceilings for loans against securities.
Background
Bank exposure to capital markets — through direct equity investments, loans against shares, underwriting commitments, and guarantees to market participants — creates a channel through which capital market volatility can transmit to the banking system. The RBI's concern about this interconnection has grown as Indian equity markets reached record valuations in 2025-26, with increased retail participation driving demand for margin funding and loans against securities.
The previous CME framework, last updated in 2020, was considered insufficiently granular to capture the full range of capital market exposures. The revised circulars introduce a more structured approach covering credit facilities, risk management, capital adequacy treatment, and disclosure requirements across nine separate master directions.
Key Provisions
The framework establishes the following norms:
Aggregate CME cap: Total capital market exposure of a bank or SFB cannot exceed 40% of eligible capital (Tier 1). Direct capital market exposure — equity investments, underwriting, and loans against shares — is further limited to 20%.
Irrevocable commitment treatment: Irrevocable payment commitments in capital market transactions are treated at 100% credit conversion factor (CCF) as financial guarantees, with a 125% risk weight applied to the CME component. This significantly increases the capital charge.
Acquisition finance limits: Loans for acquisition of shares (including promoter stake funding) are capped at 75% of the transaction value, with specific debt-equity limits prescribed for the borrowing entity.
LTV ceilings for loans against securities: Specific loan-to-value ratios are prescribed for different categories of securities (equity, debt, mutual funds), with margin maintenance requirements.
CMI lending restrictions: Loans against capital market instruments (CMI lending) are subject to enhanced restrictions for SFBs, reflecting their higher risk profile relative to commercial banks.
Mandatory disclosure format: Banks must report detailed capital market exposure data in their financial statements using the prescribed format, enhancing transparency for depositors, investors, and supervisors.
Implications for Practitioners
The 40% aggregate cap and 20% direct exposure limit will require immediate portfolio assessment by banks with significant capital market-linked books. Banks engaged heavily in margin funding, share-backed lending, and underwriting may need to reduce exposures or raise additional Tier 1 capital.
For banking lawyers, the irrevocable commitment treatment at 100% CCF represents a material change in how settlement guarantees and underwriting commitments are capitalised. Clients providing clearing and settlement services to market intermediaries face elevated capital requirements.
The acquisition finance cap at 75% LTV will affect leveraged buyout and promoter funding structures. Corporate finance advisors must factor in the reduced banking leverage available for share acquisitions and structure deals accordingly.
Frequently Asked Questions
Do these norms apply to all scheduled commercial banks including public sector banks?
Yes. The CME framework applies to all commercial banks — public sector, private, foreign, and small finance banks. Separate circulars were issued for commercial banks (Circulars 254-258) and SFBs (Circulars 259-262) with substantially identical provisions but tailored to respective regulatory contexts.
What reporting obligations do banks have under the new CME framework?
Banks must report detailed capital market exposure data using the mandated disclosure format in their quarterly and annual financial statements. The reporting includes breakdowns by type of exposure (direct equity, loans against shares, underwriting, guarantees), counterparty categories, and concentration metrics. The first reporting under the new format is due for the quarter ending June 30, 2026.