New Delhi: Founder and CEO of Zerodha, Nithin Kamath, has expressed worry about the widespread trend of margin trading in India, which he said could result in larger issues if the stock market crashes.
The Margin Trading Facility (MTF) is another way of investors can invest in shares with only part of the money and can take the rest from a broker. This can boost investors’ returns during the upward trending period. But, during times of falling prices, the same loan can be a lot more expensive.
Kamath stated that Zerodha is now in the business of MTF and it has grown to approximately ₹9,000 crore. About ₹6,000 crore of this has been borrowed by customers for purchase of shares. This sum is about 25% of Zerodha’s net worth. Now the income generated from such lending makes up about 10% of the brokerage’s earnings.
The more significant issue is the high level of margin funding taking place in the Indian market. As per the latest reports of exchanges, total MTF books in India have crossed the ₹1.5 lakh crore mark. This translates to an increasing number of stocks bought on margin. This equates to more borrowings of money to invest in stock.
The concern for Kamath is primarily of what it is when it comes to a big market correction. When the stock price drops drastically, investors who use borrowed money may be called by the margin call and they may be forced to sell their stocks to provide repayment for the borrowed money. In a situation where numerous investors begin selling at the same time, it can cause prices to drop even more.
This forms a vicious circle of falling prices, increased sales and subsequent further price reductions. Overselling pressure could be imposed on brokers if the value of shares held as security decreases at a rapid rate.
Kamath has thus termed the progress of MTF as “scary” although, it is a key revenue stream for Zerodha. He also stated that for most investors, the MTF might not be an appropriate place because losses can rapidly increase with leveraging.
His warning doesn’t imply that a fall is inevitable; it simply indicates that a market crash could occur. Rather, it points to the dangers of over-leveraging in times when investors are increasingly leveraging to become involved in the stock market.
The bottom line to investors is easy enough: don’t be afraid to borrow money to invest, but when the market turns sour, those losses can come much quicker.
