- Rising use of Margin Trading Facility (MTF) may increase risks during sharp market falls
- Nearly 50% of MTF exposure is in non-F&O stocks with weak liquidity and lower circuits
- MTF allows buying stocks with partial upfront payment, increasing both gains and losses
Rising use of Margin Trading Facility, or MTF, across brokerages could increase risks during a sharp market fall, according to Nithin Kamath.
The concern becomes bigger when leveraged positions are concentrated in mid- and small-cap stocks that may become difficult to sell during a crash.
Kamath said MTF books are growing across brokers even though broader markets have not moved significantly higher. He warned that nearly 50% of the industry's MTF exposure is in non-F&O stocks, where lower circuits and weak liquidity could make exits difficult if markets turn volatile.
How MTF Works
Margin Trading Facility allows investors to buy stocks by paying only part of the total value upfront, while brokers fund the remaining amount.
For example, an investor can buy shares worth Rs 1 lakh by putting in only a fraction of that amount and borrowing the rest from the broker.
This increases buying power during rising markets. But losses can also rise faster if stock prices fall sharply.
Kamath said the biggest risk emerges when investors pledge stocks as collateral and use that margin to take larger positions in the same stock. "A customer pledges Stock A, gets 80% margin on it, and uses that to take further positions worth 400% in the same stock," he said in a post on X.
He said the risks become higher in mid- and small-cap stocks because lower circuits can leave brokers with no exit route during a sharp fall.
The Real Concern
Kamath warned that brokers may be left with losses if stock prices fall beyond the margin provided by clients. "If a stock moves more than the margin provided, the bad debit is on the broker," he said.
He added that recovering losses from customers after a sharp fall may not be easy.
Kamath also said some brokers may have MTF books close to 500% of their net worth, which is the maximum level allowed by regulations.
While Zerodha does not currently allow collateral margin for MTF trades, Kamath said competitive pressure could force the brokerage to offer it in the future. He said Zerodha's MTF book has grown over the past 16 months but remains at around 25% of its net worth.
If Markets Fall
Kamath said MTF may appear to be an easy source of revenue for brokers, but risk management teams have to ensure firms do not face large losses during a market shock.
"If markets crash, brokers could end up holding losses from MTF positions they can't exit and that puts the entire ecosystem at risk," he said.
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