RBI’s 100% Collateral Rule Ends Cheap Leverage, Zerodha’s Nithin Kamath Warns of Higher Trading Costs

The era of cheap borrowing in India’s stock markets appears to be coming to an end, as the Reserve Bank of India (RBI) tightens lending standards for brokers and other financial market participants. Nithin Kamath, co-founder and CEO of discount brokerage Zerodha, has raised concerns about growing trading costs and lower leverage for brokers and traders in response to the central bank’s most recent directives, which require 100% collateral for bank funding of brokerages and intermediaries. Kamath’s warnings can be heard throughout the financial ecosystem as market participants prepare for the rules to take effect on April 1, 2026.

Kamath outlined in a series of social media posts how the new regulatory reforms, which are targeted at reducing leverage and guaranteeing stronger financial security, will considerably increase brokerage financing costs and make short-term trading products more expensive. These measures represent a structural shift in how financial intermediaries are supported, which might have consequences across the securities markets, especially derivatives and intraday trading.

RBI’s New Rules Bring 100% Collateral Requirement and End Cheap Bank Funding:

Under the existing regulatory framework, brokers and clearing members could obtain bank guarantees or funding with only partial collateral. Typically, a fixed deposit or cash would cover about 50 per cent of the required amount, while the rest could be secured through personal or corporate guarantees. However, in its updated lending norms released late last week, the RBI has ended this practice. From April 1, banks extending credit or bank guarantees must ensure 100 per cent secured funding, eliminating the use of personal or corporate guarantees as acceptable collateral.

According to Kamath, the new rule will increase the cost of some funding channels, particularly intraday leverage and Margin Trading Facilities (MTF) offered by brokers to clients. Under the new structure, banks must need full collateral for these lines of credit, with at least 50% in cash or cash equivalents. This marks an important change from previous practices, essentially reducing the leverage available to brokers and prop trading desks.

The necessity for properly supported bank guarantees also means that Professional Clearing Members (PCMs), who previously received preferential collateral treatment, must now adhere to the same criteria as other intermediaries. Previously, PCMs could submit smaller collateral (about 25%) to acquire bank guarantees; today, they must furnish collateral on par with others, increasing the cost of acquiring such guarantees and limiting the scope of lighter leveraged positions. Kamath explained that while new laws may increase prices for brokers throughout the sector, the impact on Zerodha’s clients may be minimal. Zerodha is a self-clearing member that does not rely on third-party funding or bank guarantees for customer trades, differentiating it from other industry rivals. As a result, Kamath stated that the new rules will not immediately influence Zerodha’s customer charges.

Implications of Higher Trading Costs and Reduced Leverage:

The RBI’s move comes amid broader concerns about risk in the trading ecosystem and aims to ensure that bank credit is used for client servicing and settlement obligations, rather than for leveraged speculative trading by brokers and proprietary desks. By requiring brokers to fully collateralise their funding, the RBI intends to reduce systemic risk in markets where high-speed, high-leverage trading has long been a feature.

One direct effect of the collateral overhaul will be on intraday trading, which allows traders to buy and sell the same security within a single trading session on leverage. With the new 100 per cent collateral mandate, the cost of providing intraday funding will rise sharply. Brokers will need more capital on their balance sheets to support the same level of client leverage they offered previously. As a result, brokers may either reduce available leverage or pass on increased costs to traders through higher fees or reduced margin limits.

Similarly, Margin Trading Facilities (MTFs), which allow brokers to lend to clients who want to hold equities for a longer period of time, would become more expensive. The requirement for banks to back up these facilities with full cash collateral involves increased capital charges and opportunity expenses. These greater costs may result in restricted availability or higher interest rates for traders seeking margin lending.The cumulative effect of these measures may limit speculative trading volumes, especially in highly leveraged derivatives markets such as options and futures. Analysts and market players, including Kamath, have warned that limiting leveraged trading could have an impact on liquidity and turnover in certain areas, even if it improves overall risk management standards.

Adjustment and Adaptation Post-April:

As the RBI’s 100 per cent collateral rules take effect from April 1, 2026, industry participants will be closely watching how brokerages and traders adjust to the new framework. Some potential outcomes include restructured margin offerings, revised fee models, and increased emphasis on risk-aware trading practices. Additionally, investors and traders are likely to recalibrate their strategies in the options, futures, and margin trading segments to account for reduced leverage and higher financing costs.

Zerodha’s leadership, particularly Kamath, highlighted that, while the industry’s costs are growing, the long-term benefits of a more secure and risk-resilient market may outweigh short-term disruption. Even as critics dispute the broader impact on trading volumes, the regulator’s primary goal remains to build a healthier capital market ecosystem in which speculative excesses driven by low-cost leverage are limited and systemic stability is prioritized.Brokerages, investors, and regulators are expected to respond adaptively to the markets in the coming months as all players deal with this new chapter in India’s financial market history.