Zerodha's Nithin Kamath Warns of Growing MTF Exposure as Hidden Stock Market Risk

Risk of Margin Trading Facility Exposure Looms Large in Indian Stock Market

Zerodha Co-founder Nithin Kamath has expressed concerns about the rapid growth of margin trading facility (MTF) exposure across India's brokerage industry, warning that it could pose a serious threat to the broader stock market ecosystem if equities experience a sharp downturn. In a detailed post on social media platform X, Kamath noted that MTF books have continued to expand aggressively despite the Indian markets largely moving sideways over the past few months.

The current Indian market setup is distinct from markets such as South Korea, where investors borrowed heavily during a strong rally. Indian markets have not witnessed the same level of growth, with the situation being different from that of South Korea, where markets have seen a 150% increase in the last year alone. Margin trading facility allows investors to purchase shares using borrowed funds from brokers by pledging stocks or margins as collateral. The product has experienced significant growth over the past two years, driven by increased retail participation in equities and traders turning to leverage to maximize returns, particularly in mid-cap and small-cap stocks.

A major concern arises during sharp market corrections, when brokers may struggle to liquidate pledged shares quickly enough to recover outstanding dues. This risk intensifies when investors use pledged shares as collateral to build even larger leveraged positions in the same stock. Such structures can become especially hazardous in mid-cap and small-cap counters where liquidity is lower and circuit filters can prevent exits during periods of extreme volatility.

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Kamath highlighted that nearly 50% of the industry's total MTF exposure currently sits in non-futures-and-options stocks, which are generally considered less liquid compared with large-cap F&O counters. He noted that Zerodha still does not permit clients to use collateral margins for MTF purchases, although growing competitive pressure across the brokerage industry could eventually force the firm to reconsider its stance. However, Kamath added that Zerodha's own MTF book has expanded significantly over the past 16 months, although it remains limited to around 25% of the company's net worth.

Comparison of MTF Exposure Across Brokers

Kamath's comments come at a time when India's cash market trading volumes have moderated after last year's strong rally, even as leveraged products such as derivatives and MTF continue to witness elevated activity across the market.

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