Zerodha Founder and CEO Nithin Kamath has raised concerns over the rapid growth of margin trading funding (MTF) in India, calling it the "biggest nightmare" for him as a broker after witnessing the sharp sell-off in South Korea's stock market.
In a post on X, Kamath said the recent turmoil in the Korean market highlighted the risks associated with leveraged investing, particularly as MTF books across the brokerage industry continue to expand.
"My biggest nightmare as a broker is what's happening in the Korean markets right now," he wrote.
Kamath said Zerodha's MTF book has grown to around Rs 9,000 crore, describing it as the firm's biggest risk since it was founded in 2010.
"In terms of pure risk, MTF is by far the biggest risk we have taken since we started in 2010," he said.
He pointed out that nearly half of Zerodha's MTF exposure is in non-F&O stocks, which pose a greater risk during market downturns as they can repeatedly hit lower circuits, preventing investors and brokers from exiting positions.
"At least half of it is in non-F&O stocks, which can hit lower circuits every day without offering an exit," Kamath noted.
Explaining the sequence of events witnessed in South Korea, Kamath said sharp market rallies often encourage investors to take on more leverage as rising collateral values enable additional borrowing. This leverage is further amplified by derivatives and leveraged exchange-traded funds (ETFs).
However, when markets reverse, the process works in the opposite direction.
"The first leg of selling tends to be small, but as collateral and margin values drop, margin calls increase, leading to forced selling. Forced unwinding from leveraged ETFs makes this worse, and this downside move becomes a self-reinforcing loop until things stabilise," he said.
Kamath cautioned that India has not experienced a market correction of a similar magnitude since margin trading funding became widely popular over the past three to four years.
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He said that although MTF remains a relatively small percentage of the overall market capitalisation, a sharp correction in Indian equities could trigger significant selling pressure, particularly in the small- and mid-cap segments.
"Brokers today typically provide MTF on around 1,500 stocks," he said.
Despite the risks, Kamath credited the Securities and Exchange Board of India (SEBI) for maintaining prudent regulations that have prevented excessive leverage in the Indian market.
"Luckily, thanks to SEBI, we've avoided the worst excesses that typically arise from unchecked leverage," he added.
Kamath also highlighted a website maintained by his colleague Prayag Verma that tracks market statistics, including margin trading funding data, to help investors better understand leverage trends in the market.
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