- Nithin Kamath has warned that record margin trading exposure is the biggest risk facing Zerodha, particularly as a sharp market correction could trigger forced selling in small- and mid-cap stocks.
- Kamath described his biggest nightmare as a broker as the current situation in the Korean markets, attributing it to the rapid growth of Zerodha's MTF book.
- He emphasized that the composition of the MTF portfolio is concerning, with nearly half of the ₹9,000-crore exposure in non-F&O stocks that can hit lower circuits, complicating exits during downturns.
- Kamath noted that if Indian markets experience a KOSPI-like crash, it could lead to severe sell-offs in mid- and small-cap stocks due to the rise in MTF trading.
- He explained that prolonged market rallies encourage higher leverage, which can lead to margin calls and forced selling when markets decline.
- Kamath stated that the MTF market in India has grown rapidly over the past three to four years but has not yet faced a significant market correction similar to that of South Korea since the COVID-19 pandemic.
- He expressed concerns that while MTF remains a relatively small proportion of India's overall market capitalization, a steep decline could result in severe selling pressure across many small- and mid-cap stocks.
- Kamath credited the Securities and Exchange Board of India (SEBI) for limiting excessive leverage in the Indian market, which has helped avoid the worst excesses typically associated with unchecked leverage.
Zerodha's Nithin Kamath has expressed deep concerns over the brokerage's growing margin trading exposure, which has reached approximately ₹9,000 crore. He described this as the biggest risk the firm has taken since its inception in 2010. Kamath's fears are heightened by the recent turmoil in the South Korean markets, where a sharp sell-off has raised alarms about the potential for similar events in India.1
"My biggest nightmare as a broker is what's happening in the Korean markets right now," Kamath stated, emphasizing the risks associated with the rapid growth of margin-funded investing. He noted that nearly half of Zerodha's MTF book is concentrated in non-F&O stocks, which can hit lower circuits, complicating exits during market downturns.2
The overall margin trading facility (MTF) market in India has surged to a record ₹1.44 lakh crore, with a 23% increase this year alone. Kamath warned that if Indian markets were to experience a KOSPI-like crash, it could lead to severe sell-offs in mid- and small-cap stocks due to the rise in MTF trading. He cautioned that while MTF remains a relatively small proportion of India's overall market capitalization, a steep decline could trigger disproportionate selling pressure.4
Despite his concerns, Kamath acknowledged the role of the Securities and Exchange Board of India (SEBI) in limiting excessive leverage, stating, "Luckily, thanks to SEBI, we've avoided the worst excesses that typically arise from unchecked leverage."8
“Kamath cautioned that Zerodha's ₹9,000-crore margin trading facility (MTF) book, with nearly half in non-F&O stocks, could lead to forced selling during a market downturn. He emphasized that while MTF remains a small part of India's market cap, a severe correction could trigger disproportionate sell-offs in small- and mid-cap stocks.”
CNBC TV18
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