RBI Proposes Higher Loan-to-Value Limits for Loans Against Shares and Debt Mutual Funds

Context:

The Reserve Bank of India (RBI) released a draft circular on October 25, 2025, proposing to raise the LTV ceilings and loan limits for individuals availing loans against shares and debt mutual funds. The move aims to enhance credit flow, align prudential norms with market dynamics, and streamline capital market exposures.

Key Highlights of the Draft Proposal:

1. Increased Loan-to-Value (LTV) Ratios:

• For Shares: Increased from 50% to 60%.
• For Debt Mutual Funds (MFs): Increased from 50% to 75%.
• For Debt Securities and Commercial Papers: LTV ceiling also proposed to be raised.
• For Government Securities (G-Secs) and Sovereign Gold Bonds (SGBs):
  • LTV to follow banks’ internal policies or existing gold loan norms.

2. Loan Amount Limits:

• Maximum loan amount: Increased fivefold — from ₹20 lakh to ₹1 crore per individual.
• Loan for acquisition of securities in secondary markets: Capped at ₹25 lakh per individual.

3. Risk Management Conditions:

• If the credit rating of a pledged debt security falls below investment grade (BBB-), banks must:
  • Replace the security with another eligible one within 30 working days, or
  • Repay a proportionate portion of the exposure.
• No loans (secured or unsecured) to be granted by banks to their own employees or employee trusts for purchasing the bank’s own shares under ESOPs, IPOs, or secondary market transactions.
• Loans against locked-in securities are not permitted.

Objective and Rationale

• To liberalize credit access for investors and individuals with financial assets.
• To improve liquidity in capital markets while maintaining prudential safeguards.
• To harmonize LTV norms across different types of securities and mitigate concentration risks.
• To align regulatory frameworks with evolving market instruments and investor profiles.