In a recent LinkedIn post, Nithin Kamath, Founder and CEO of Zerodha, raises critical concerns about the rapid growth of margin trading funding (MTF) in India and the apparent lack of robust risk management frameworks among brokers. Kamath highlights that while MTF has surged approximately fivefold in the last four years to over ₹110,000 crores, the industry may be overlooking significant inherent risks.
The Unseen Risks of Margin Funding Growth
Kamath points out that the competitive landscape forces brokers to offer the maximum permissible leverage, which is up to 5X (20% margin) on many stocks, to avoid losing business. This ‘race to the bottom’ dynamic, he argues, creates a precarious situation, especially when compared to futures and options (F&O) trading.
“Unlike F&O, MTF has several risk multipliers: Clients hold positions for months vs days. 1,300 stocks (many illiquid) allowed vs only the top 200 in F&O. All buy positions vs two-way flow in F&O, making risk management much harder.”
He elaborates on these multipliers, emphasizing that MTF positions are often held for extended periods, involve a much broader and often less liquid set of stocks, and consist solely of buy positions, unlike the two-way flow seen in F&O. This asymmetry makes risk management considerably more challenging.
Leverage Amplified by Collateral
A particularly concerning aspect highlighted by Kamath is how leverage is amplified when clients use existing stocks as collateral. He illustrates a scenario where ₹1 lakh worth of stocks, after a 20% haircut, can provide a collateral margin of ₹80,000. This margin, in turn, can be used to buy up to ₹5 lakh worth of MTF, effectively magnifying exposure significantly.
Structural Weaknesses in Market Liquidity
Kamath identifies a fundamental structural problem within Indian equity markets: liquidity, which appears robust during market upswings, tends to evaporate during downturns. With minimal short-selling options available, there is often no natural ‘bid’ when markets reverse. This lack of a natural counter-balance, he explains, can lead to forced liquidations that become self-reinforcing, particularly impacting stocks outside the highly liquid F&O segment.
“The structural problem: Indian equities have decent liquidity when markets rise, but it completely dries up during drawdowns. Minimal short-selling (SLB) means almost no natural bid when things reverse.”
Regulatory Safeguards and Their Limitations
While SEBI has imposed caps on MTF, limiting it to 50% of a broker’s net worth plus borrowings (or up to 5x net worth), Kamath suggests these regulations primarily aim to prevent broker defaults rather than protect brokers from client defaults. The current system, he implies, might be insufficient to handle widespread client defaults during a market crash.
“SEBI caps MTF at 50% of broker networth + borrowings (or up to 5x networth) to prevent broker defaults. But this potentially protects the system from broker failures, not brokers from client defaults.”
Kamath’s central thesis is that the combination of escalating MTF volumes, maximum leverage being offered by all brokers, and the inherent illiquidity during market drawdowns creates a recipe for potential chaos. He notes that the market has not experienced a severe downturn since MTF scaled up significantly, leaving the true impact untested.
“We haven’t seen a 2008, 2015, or COVID-type event since MTF scaled up. When we do, it will cause mayhem—not because any broker fails, but because forced selling into illiquid markets will cascade.”
He predicts that the interest income and potentially some capital earned by brokers could be significantly eroded during a rapid market decline. The risk, according to Kamath, is amplified beyond the top stocks due to their lower liquidity, suggesting a systemic risk that has yet to be fully confronted.
📝 About This Content
This article is based on insights shared by Nithin Kamath on LinkedIn.
📅 Originally posted on January 21, 2026 | View original post on LinkedIn →