Zerodha CEO Nithin Kamath has warned that the growth of Margin Trade Facility (MTF) poses a significant risk to the Indian market. Drawing parallels to the recent 40% drop in South Korea’s KOSPI index, he cautioned that forced liquidations could trigger a severe spiral, especially in mid and small-cap stocks.
Zerodha co-founder Nithin Kamath has voiced serious concerns regarding the rapid expansion of Margin Trade Facility (MTF) in India. He highlighted that the firm's own MTF book has grown to approximately Rs 9,000 crore. A critical concern he identified is that about half of this amount is tied to non-F&O stocks. Unlike stocks in the Futures and Options segment, these assets can hit lower circuit limits, potentially trapping investors who may find it impossible to sell their holdings during a sharp market downturn.
The Lesson from South Korea
Kamath’s warning follows a major decline in the KOSPI index in South Korea, which fell 40% from its peak in June. The market saw extreme volatility, with the index sliding 13% in a single session and facing multiple circuit breakers. The downturn was fueled by disappointing financial results from major technology firms like SK Hynix, which deepened concerns about the sustainability of investments in artificial intelligence. This rapid decline resulted in significant wealth erosion, prompting South Korean authorities to call emergency meetings to stabilize the market.
Why Leverage Increases Market Vulnerability
Margin trading allows investors to buy more shares than they can afford with their available cash by pledging existing holdings as collateral. In a rising market, this leverage can amplify gains. However, Kamath warned of a dangerous cycle often seen in a one-way rally. As share prices rise, the value of the collateral increases, encouraging further borrowing. When the market turns downward, this cycle reverses rapidly. Falling collateral values trigger margin calls, forcing brokers to sell shares to recover their money. If many investors are forced to sell simultaneously, it creates a self-reinforcing downward spiral in stock prices.
Risks in the Indian Market
While India has seen a strong market performance for several years, Kamath noted that the widespread use of MTF is a relatively new phenomenon, gaining popularity only in the last three to four years. The Indian market has not faced a crash of the magnitude seen in the KOSPI index since the COVID-19 pandemic. Currently, brokers offer MTF on roughly 1,500 stocks. If a sudden, sharp correction were to occur, mid and small-cap stocks—which are often less liquid—would likely be the most vulnerable to forced selling. Investors should track how regulatory frameworks for margin trading evolve and monitor their own exposure to leveraged positions, particularly in high-volatility stocks that may lack sufficient liquidity during market stress.