Zerodha's Nithin Kamath Calls MTF Growth 'Scary' As India's Margin Book Hits Record Rs 1.5 Lakh Crore

Zerodha founder and CEO Nithin Kamath has described the rapid growth in margin trading facility (MTF) as a growing risk for the brokerage, warning that leverage can look harmless during a rising market but become a problem when prices fall sharply.

"MTF is one area where the business growth is scaring me," Kamath said in Zerodha's latest business update. "Leverage always looks great when markets are doing well, and the risks become obvious only when things go wrong."

His comments come as India's MTF book has reached a record level. The combined MTF book of NSE and BSE stood at about Rs 1.50 lakh crore on August 25, according to exchange disclosures. NSE accounted for Rs 1,43,820 crore, or about 95.7 per cent of the total, while BSE accounted for Rs 6,380 crore.

MTF allows investors to buy eligible shares by paying only part of the purchase value upfront, with the broker funding the balance. The shares are pledged as security for the funding. The investor gets a larger market position with less money of their own, but pays interest on the amount borrowed.

That leverage works both ways. A rise in the share price can magnify gains on the investor's own capital, while a fall can magnify losses. The financing cost also continues for as long as the borrowed position remains open.

MTF Has Grown More Than 25 Times Since 2019

The scale of the MTF market has changed sharply in post Covid. The combined book stood at just Rs 5,850 crore at the end of 2019. It has now grown to around Rs 1.50 lakh crore, more than 25 times in nearly seven years.

India's overall stock market, meanwhile, has grown at a much slower pace. The total market capitalisation of NSE-listed companies is around Rs 495 lakh crore, roughly three times the 2019 level.

The numbers suggest that investors' willingness to use borrowed money to build larger equity positions has increased much faster than the underlying market itself.

The MTF book is also spread across a large number of stocks, although a relatively small group accounts for a sizeable chunk. The top 10 stocks account for 11.7 per cent of the entire book, or about Rs 17,600 crore. HDFC Bank alone accounts for around 2.4 per cent, or Rs 3,550 crore.

The top 132 stocks contribute about half of the overall MTF book, at roughly Rs 75,420 crore.

Futures and Options (F&O)-linked stocks account for 46.1 per cent of the book, while non-F&O stocks account for 51.4 per cent and exchange traded funds (ETFs) make up the remaining 2.5 per cent.

'MTF Isn't A Good Product For Most Customers'

The MTF business Kamath calls "scary" is also becoming a key source of Zerodha's revenue. That irony is hard to miss.

The brokerage started its MTF business in December 2024. Kamath said the product has brought some predictability to revenue because Zerodha earns interest income on the funding it provides. MTF now accounts for about 10 per cent of Zerodha's revenue, he said.

Yet, Kamath does not believe the product is suitable for most investors.

"But if you ask me whether MTF is a good product for customers, I'd say it isn't for most of them," he said.

"The only thing we can really do is educate customers on the risk and not push it constantly or nudge them into borrowing money to invest."

Zerodha's Own MTF Exposure Is A Concern

Kamath said Zerodha's MTF book has reached Rs 9,000 crore, with customers having borrowed around Rs 6,000 crore.

"While the book size is Rs 9000 crore, our clients have borrowed ~ Rs 6000 crore, which is ~ 25 per cent of our net worth," he said.

"This MTF business is scary, as brokers can borrow up to 5 times their net worth. While we are okay, we might get pulled down if there were a market contagion due to this leverage."

The concern is not simply about individual customers losing money. A sharp market fall could put pressure on leveraged positions across the system at the same time. Brokers have to manage the funding they provide as well as the collateral against those positions.

Kamath said the MTF book is therefore one area that Zerodha is watching closely.

MTF Is Replacing Lost Transaction-Fee Income

The rapid growth in MTF also comes at a time when Zerodha's traditional revenue streams have faced pressure.

Kamath said Zerodha's revenue has remained broadly steady but has not grown in real terms. He attributed that to the end of the bull market and the removal of a rebate on transaction charges.

"The good news is that the loss of transaction fee revenues is now being offset by our MTF earnings," he said.

That creates an unusual situation for the brokerage. A product that management considers risky for customers has also become an important source of predictable revenue.

Kamath said the brokerage's approach is to avoid pushing customers towards the product simply to increase revenue.