Nithin Kamath Warns Investors About MTF Risks As Margin Trading Facility Gains Popularity

Zerodha co-founder Nithin Kamath has issued a warning regarding the rise of Margin Trading Facility (MTF) books India in a post on social media platform X. The MTF mechanism enables investors to buy shares by paying up only a fraction of the total cost as a margin, while borrowing the rest of the cost from the broker. Investors then pay a short sum to the broker as interest for the amount borrowed for the trade.

Lack Of Market Momentum

In his post Kamath pointed out that while the broader equity markets have moved sideways in recent months, MTF books have grown. He compared this to the situation in markets like Korea where the 150 per cent surge in the KOSPI has led to increased participation from investors.

"MTF books are growing across brokers despite the broader markets going nowhere," Kamath noted. He contrasted this with hyper-bullish phases like the South Korean market, where a 150 per cent surge justified aggressive borrowing to ride a vertical rally. In India, however, leverage expands without the supporting market momentum,” Kamath said.

Data from CARE Edge Ratings shows that after a steep 5.6 per cent decline during a volatile March, the average MTF book across exchanges rebounded by 1.6 per cent sequentially in April 2026 to Rs 1.14 lakh crore. When viewed on a year-on-year basis the MTF Book has grown by 60 per cent year-on-year compared to April 2025. 

Kamath’s Warning On MTF

Kamath highlighted risks in adopting "layered leverage" and how it creates a house of cards due to the kind of stocks available in the MTF segment.

"A customer pledges Stock A, gets 80 per cent margin on it, and uses that to take further positions worth 400 per cent in the same stock. This looping creates a highly concentrated house of cards,” Kamath said.

Nearly 50 per cent of the brokerage industry's MTF book comprises non-Futures and Options (non-F&O) stocks which are mainly from the mid-cap and small-cap space. Unlike their relatively more liquid large-cap counterparts, these small and midcap stocks lack mechanisms and run the risk of becoming illiquid.

"The big risk with MTF is the risk of the stock becoming illiquid in case there's a sharp market fall," Kamath said.

Risks For MTF Investors

On the other hand, retail investors also face significant risk if a concentrated, leveraged stock drops rapidly and an investor's entire margin vanishes. Typically steep market reversals trigger automatic exchange-mandated "lower circuits" on mid and small-cap stocks, leading to a halt in trading. This results in the investors watching their capital get wiped out while still owing high interest on the borrowed principal.

"If that stock is a mid or small-cap stock, circuits kick in, and there's simply no exit if markets turn around," Kamath said.

Perils to the Financial Ecosystem

Kamath also spoke about the risks the financial ecosystem faces in such situations. If a stock falls more than the customer's margin threshold and the customer defaults, the resulting bad debt falls on the broker.

"If a stock moves more than the margin provided, say 20 per cent, the bad debit is on the broker," Kamath said.

Brokers typically cover defaults by liquidating pledged collateral, but if a stock’s price falls significantly, brokers trying to dump illiquid mid-caps do not find any buyers. While Zerodha’s MTF book is capped conservatively at roughly 25 per cent of its net worth, Kamath warned that some brokers have scaled their MTF exposure close to 500 per cent of their net worth.

Kamath concluded that while MTF looks like easy money during quiet times, there’s a need for robust risk management to ensure that a single bad day doesn’t lead to mounting losses for both investors and brokers.