Zerodha's Nithin Kamath says surge in margin lending could be 'scary'

Nithin Kamath, the founder and CEO of Zerodha, has expressed concern over the growing margin trading facility (MTF) business that the brokerage firm is increasingly engaged in. As reported by Bloomberg on August 27, Zerodha's MTF exposure has significantly risen, contributing to about a tenth of the company's total revenue. This increase in leverage has helped generate interest income for Zerodha, but it also poses the risk of stress on the business if a sharp correction occurs in Indian equities.

A sudden market decline could lead to forced selling by leveraged investors, creating a feedback loop where falling prices trigger additional selling. Kamath warned that this could create unforeseen levels of stress in the business, particularly in the small- and mid-cap segments where lower liquidity may make it harder for brokers to unwind pledged positions during a selloff.

Regulatory bodies like the Securities and Exchange Board of India (Sebi) have also taken notice of these risks, proposing changes to the framework in June to address them.