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RBI has recently informed the banks to end the decades long practice of financing stock brokers during the day without collaterals, <a target="_blank" href="https://economictimes.indiatimes.com/markets/stocks/news/banks-to-stop-collateral-free-intra-day-funding-to-brokers/articleshow/91731697.cms">reported</a> The Economic Times.

Intra-day funding, better known as ‘daylight exposure’ in banking parlance, is a crucial facility that enables brokers to tide over a few hours gap pending receipt of money from stock buyers, or in furnishing derivatives trade margin in the morning or paying for spot trades by institutions in case of mismatches.

The Reserve Bank of India (RBI) has recently communicated to four large private sector banks that such intra-day credits have to be backed by a minimum margin of 50 percent in the form of fixed deposits and marketable securities, two senior bankers said, wrote Economic Times.

Thus, a broker drawing ₹500 crore as intra-day fund must give collaterals of at least ₹250 crore to the lending bank.

“Brokers will have to arrange collaterals, some of the smaller ones will find it very difficult. Their cost is expected to rise. They will have to raise funds, create fixed deposits which can be given as collaterals, and may in the process run a negative carry. We wonder if there is a strong rationale for this when there is a strong margin system and other checks and balances put in place by stock exchanges and clearing houses,” said one of the persons.

Till now, such intra-day exposures to market intermediaries — unlike guarantees to a broker or longer-tenor loans to finance proprietary trades — were not considered as ‘loan’ to brokers. It largely remained a grey area as neither banks categorised it as capital market exposure nor the regulator insisted on it. However, this changed with RBI imposing conditions on banks for having current accounts of firms and companies.

RBI tells banks to discontinue collateral-free intra-day funding to brokers: Report

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