Indian bank stocks experienced a surge following the Reserve Bank of India's (RBI) decision to ease capital market lending norms. The RBI has rolled out a series of measures designed to boost bank lending and deepen the role of banks in capital markets. These reforms, effective from October 2025, aim to expand credit access, improve liquidity, and encourage wider participation in equity markets.

Key Policy Changes

Several key changes have been introduced by the RBI:

• Financing Acquisitions: The central bank now allows domestic banks to fund acquisitions by Indian corporates, an area previously dominated by foreign lenders. This move addresses a long-standing demand from the Indian banking industry.
• Increased Loan Limits: The cap on loans against equity shares has been raised significantly from INR 2 million to INR 10 million per individual. The RBI has also proposed removing the ceiling on lending against listed debt securities, giving banks greater flexibility to support investors.
• IPO Financing: Bank financing for Initial Public Offerings (IPOs) will also increase to INR 2.5 million per individual.
• Easing Restrictions on Large Borrowers: The RBI plans to withdraw the 2016 framework that limited loans to large corporations, removing the previous cap and extra capital requirements that made lending costly. Credit concentration will continue to be monitored at individual banks, with system-wide safeguards deployed only if necessary.
• Loans against Shares: Loans against shares have been increased from Rs 20 lakh to Rs 1 crore per individual, and IPO financing limits have raised from Rs 10 lakh to Rs 25 lakh per person.

Impact on Banks and Markets

These measures are expected to have several positive effects:

• Increased Credit Flow: The changes are designed to boost lending and create a more bullish environment for the broader financial ecosystem, including the nation's stock exchanges.
• Improved Liquidity: By easing restrictions, the RBI aims to widen participation from retail and institutional investors, improve liquidity flows into the primary market, and deepen financial intermediation.
• Greater Flexibility for Banks: Banks now have greater flexibility to extend credit backed by shares, REITs, InvITs and listed debt.
• Offsetting Liquidity Shortfall: The relaxations on lending against shares, debt securities, and IPO financing are aimed at offsetting some of the liquidity shortfall, strengthening domestic participation, and shoring up confidence in India's capital markets.
• Boost to M&A Activity: Allowing banks to finance mergers and acquisitions will boost such activity. Banks can now tap into this space and capture a meaningful share of acquisition financing.

Expert Opinions

Experts have weighed in on the potential impact of these policy changes:

• Dhruv Parikh, partner – Financial Services Risk Consulting, EY India, said that the RBI's move to transition from an incurred loss model to an Expected Credit Loss (ECL) framework is a pivotal moment for Indian banking.
• Namrata Mittal, Chief Economist, SBI Mutual Fund, stated that these measures represent a significant push toward easing regulatory constraints and facilitating stronger credit growth across the financial system.
• Chanchal Agarwal, CIO Equirus Family Office, noted that this move is significant, as it enables banks to recapture flows that had increasingly shifted to structured credit players.
• C S Setty, chairman, State Bank of India (SBI), said that allowing of M&A financing by Indian banks is growth accretive and will foster incremental credit flow from banks.

Stock Market Performance

The stock markets reacted positively to the RBI's announcements. The Nifty Bank index, however, has seen its price-to-book ratio decline to a five-month low. Kotak Institutional Equities has recommended large-cap private banks and PSU bank stocks.

On October 1, 2025, benchmark indices Sensex and Nifty extended early gains and were trading significantly higher, helped by buying in bank stocks. The 30-share BSE Sensex jumped 599.43 points to 80,867.05, and the 50-share NSE Nifty climbed 170.7 points to 24,781.80.

Indian Bank's advances rose 13% on a year-on-year basis, the highest quarterly growth since the first quarter of FY24. Its deposits also rose 12%, the highest since the second quarter of FY23.