Nithin Kamath sounds alarm on rising MTF risks as leveraged bets surge despite flat markets

Nithin Kamath has warned that rapidly rising margin trading facility (MTF) exposure across brokerages could become a major risk for India’s stock market ecosystem if markets witness a sharp correction. In a detailed post on social media platform X, the Zerodha co-founder said MTF books continue to expand aggressively even though Indian equity markets have largely moved sideways in recent months.

Kamath contrasted the current situation with markets such as South Korea, where investors borrowed heavily during a sharp rally. “This isn’t like the Korean markets, for example, where the markets are up 150% in the last year alone, and people are borrowing to ride that rally. Our situation is different,” he said.

MTF allows investors to buy stocks by borrowing funds from brokers while pledging shares or margin as collateral. The product has grown rapidly over the past two years as retail participation in equities surged and investors increasingly used leverage to amplify returns, especially in mid-cap and small-cap stocks.

Kamath said one of the biggest risks emerges during sudden market declines when brokers may struggle to liquidate pledged stocks quickly enough to recover borrowed amounts. “The big risk with MTF is the risk of the stock becoming illiquid in case there’s a sharp market fall,” he said. He explained that if stock prices fall beyond the margin provided by customers, brokers are left exposed to losses. “If a stock moves more than the margin provided, say 20%, the bad debit is on the broker,” Kamath said, adding that recovery from customers in such situations is often difficult.

According to him, the risk becomes significantly larger when investors use pledged shares as collateral to build even bigger leveraged 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.

Kamath warned that such structures can become extremely dangerous in mid-cap and small-cap shares where lower liquidity and circuit filters can prevent brokers from exiting positions during market stress. “If that stock is a mid or small-cap stock, circuits kick in, and there’s simply no exit if markets turn around,” he said.
He also revealed that nearly 50% of the industry’s MTF exposure currently lies in non-futures-and-options stocks, a segment generally considered less liquid compared with large-cap F&O counters. The Zerodha founder said his brokerage still does not allow customers to use collateral margin for MTF purchases, though competitive pressure in the industry may eventually force changes. “While we still don’t allow collateral margin for buying MTF, competitive pressure would mean we will have to,” he said.Kamath added that Zerodha’s own MTF book has increased significantly over the past 16 months but remains around 25% of the company’s net worth. For some brokers, however, he said MTF exposure may be as high as 500% of net worth, which is currently the maximum limit allowed by regulators.

The comments come at a time when India’s cash market volumes have slowed after last year’s strong rally, while leveraged trading products including derivatives and MTF continue to see elevated activity.