In a recent LinkedIn post, Nithin Kamath, founder of Zerodha, has raised concerns regarding the growing use of Margin Trading Facility (MTF) by brokers, highlighting potential systemic risks within the Indian stock market ecosystem.
Kamath points out that despite a stagnant broader market, the volume of MTF books is increasing across various brokerage firms. He contrasts this with markets like Korea, which have seen substantial rallies, suggesting a different dynamic at play in India.
“The big risk with MTF is the risk of the stock becoming illiquid in case there’s a sharp market fall. If a stock moves more than the margin provided (say 20%), the bad debit is on the broker. The odds of recovering a loss from a customer aren’t that great.”
Understanding the MTF Risks
Kamath elaborates on the inherent dangers, particularly when the collateral used for MTF is in the form of stocks. He describes a scenario where a customer pledges a stock, receives a margin against it, and then uses that margin to take further positions in the same stock. This amplifies risk significantly, especially with mid- and small-cap stocks that are prone to circuit limits. If the market turns, these positions can become impossible to exit.
According to Nithin Kamath, a substantial portion of the industry’s MTF book, nearly 50%, consists of non-F&O stocks, exacerbating this liquidity risk.
Competitive Pressures and Regulatory Limits
The post also touches upon the competitive landscape. While Kamath states that Zerodha currently does not allow collateral margin for buying MTF, he acknowledges that competitive pressures might force them to adopt this practice. This, he warns, increases risk not only for the customer but also for the broker.
Kamath reveals that while Zerodha’s MTF book has grown significantly over the last 16 months, it constitutes only about 25% of their net worth. However, he notes that for some other brokers, this figure could be as high as 500% of their net worth, nearing the maximum limit set by regulators.
“If markets crash, brokers could end up holding losses from MTF positions they can’t exit and that puts the entire ecosystem at risk.”
The Broker’s Dilemma
The core of Kamath’s concern lies in the potential for a cascading effect. He argues that if the market experiences a significant downturn, brokers might be left with unmanageable losses from MTF positions that cannot be liquidated. This could jeopardize the stability of the entire brokerage industry.
Kamath concludes by emphasizing that while MTF might appear to be an easy source of revenue for brokers, robust risk management is crucial. As he puts it:
“MTF seems like easy money for the brokers. But the Risk Management team at brokers has to make sure that on one bad day, you don’t give it all back.” 😬
His insights serve as a critical warning to market participants and regulators about the potential vulnerabilities introduced by the rapid expansion of MTF facilities in the current market environment.
📝 About This Content
This article is based on insights shared by Nithin Kamath on LinkedIn.
📅 Originally posted on May 19, 2026 | View original post on LinkedIn →