Zerodha CEO Nithin Kamath Warns Margin Trading Could Trigger Stress In Sharp Market Correction

Zerodha CEO Nithin Kamath has issued a warning that the brokerage's rapidly growing margin trading facility (MTF) could pose increased risks during a significant market downturn. According to Bloomberg, Kamath highlighted this in his annual customer message marking Zerodha's 16th anniversary. He noted that the company's MTF exposure has grown considerably, despite the boost in interest income from lending to clients who trade with borrowed funds.

However, a severe market correction could trigger forced selling, putting additional stress on the business. MTFs accounted for around ₹9,000 crore in August, with customers borrowing about ₹6,000 crore to finance their equity purchases. Kamath revealed that interest earned from these leveraged positions now makes up about 10% of Zerodha's revenue.

The increased use of leverage is not exclusive to Zerodha; investors across India borrowed a record ₹1.36 lakh crore through MTF by July, even as cash market activity slowed. A sharp drop in share prices could lead to margin calls, compelling leveraged investors to sell their holdings, which could exacerbate price declines and initiate a self-perpetuating cycle, especially in small- and mid-cap stocks where liquidity is often limited.

Regulatory bodies like SEBI have also taken notice of the risks associated with margin financing. In June, SEBI proposed revisions to the MTF framework, proposing higher net-worth requirements for brokers and expanding funding options, with the goal of enhancing risk management measures. Kamath has advised investors to factor in interest costs, brokerage fees, and taxes when assessing the returns from leveraged trades, as these expenses can raise the break-even price.