Nithin Kamath, co-founder of Zerodha, India's largest brokerage, has voiced significant concern over the substantial increase in margin trading funding (MTF) across the Indian market. He described the situation as his "biggest nightmare as a broker," drawing parallels to the Korean markets where high leverage has heightened the risk of forced selling during price reversals. Kamath highlighted that Zerodha's own MTF book stands at approximately $1.08 billion (₹9,000 crore), indicating the broad industry trend.
The overall MTF book in India has surged to a record $16.8 billion (₹1.4 trillion), representing a 50% increase in investor debt from a year earlier. This growth is partly fueled by new-age digital brokers aggressively competing to expand client-funding portfolios, with retail and high-net-worth investors leveraging these funds at unprecedented rates. While this amount is about half of Korea’s peak margin overhang, the concentration of borrowed funds in illiquid small and mid-cap stocks is particularly worrisome. For example, some stocks have up to 15% of their market capitalization held by leveraged investors.
Kamath specifically noted that at least half of Zerodha's $1.08 billion MTF exposure is in non-futures and options (non-F&O) stocks, which lack hedging options and are vulnerable to sharp corrections due to potential lower circuits making exits difficult. He warned that a significant market downturn could trigger forced liquidations as falling stock prices reduce collateral values, leading to margin calls. If investors cannot provide additional funds, brokers' automated systems would sell shares, potentially causing a cascade of selling and further price drops in these illiquid segments. Other brokers, however, argue that India's MTF framework has safeguards, such as approved securities lists, stock-level limits, and daily mark-to-market monitoring, which were less developed in previous market stress episodes. They also highlight that the MTF book is still relatively small compared to the overall market capitalization of over $5.4 trillion (₹450 lakh crore).
Despite the concerns raised by Kamath, other financial analysts and brokers suggest that the current leverage levels, while at an all-time high of 0.41% of India's total market capitalization (0.87% of free-float market capitalization), may not be large enough to cause a systemic crisis. They contend that the MTF book represents accumulated positions rather than daily leveraged activity and that the growth also reflects the structural maturity of the market with easier access to MTF through digital platforms. Brokers like Angel One and Sharekhan anticipate a moderation in the rapid growth of MTF in the coming years, expecting a more sustainable expansion of around 15-20% annually if market conditions remain stable. They emphasize the decentralized nature of India's MTF, where margin shortfalls are resolved at an individual account level, providing a buffer against automatic market-wide liquidation.
