These days the use of Margin Trading Facility i.e. MTF is increasing rapidly in the country’s stock market. Zerodha co-founder Nitin Kamat has given a serious warning regarding this speed. He says that MTF seems to be a source of easy earning for brokers, but if even one bad day comes and risk management is missed, then all the earning can be lost in one stroke. Not only this, it can affect the entire financial system. Kamat said in a social media post on Tuesday that the MTF book of brokers is increasing, while the market is neither going up nor down. This imbalance is dangerous. Comparing it to South Korea, he said that the stock market there has risen by about 150% in a year, so people are borrowing to take advantage of that rise. The situation in India is different. Here the market is stable, but MTF is increasing, which is a dangerous sign. Explaining the biggest risk of MTF, Kamat said that if a stock falls drastically and falls more than the margin (say more than 20%), the broker has to compensate the loss. It is often difficult to recover losses from the customer. The matter becomes serious when the customer increases his investment in a share by pledging it. If there is a circuit in mid and small cap shares, neither the investor nor the broker will be able to exit. Kamat said that around 50% of the MTF book of the entire brokerage industry is in stocks which are not in the F&O (futures) segment. That is, where there is no option of hedging. Kamat cautioned that the MTF book of some brokers could reach 500% of their net worth. If there is a sudden sharp decline in the markets, such brokers may find themselves stuck in MTF positions that may not be possible to exit. Kamat also said that due to competitive pressure, collateral margin may soon have to be allowed for MTF purchases, which has been restricted till now. If this happens the risk will increase further. What is MTF and in what cases is it dangerous? MTF i.e. Margin Trading Facility is such a facility in which an investor can buy shares by borrowing from the broker. The investor invests some amount himself and the rest is given by the broker. In case of profit, the investor gets more profit, but in case of loss, the broker may also have to bear loss. If there is a huge fall in the stock and a circuit is set up, then neither the investor nor the broker can exit. This is the ‘one bad day’ that Kamat has warned about.
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Kamat warned, borrowing will sink the trend of share trading: Neither the investor nor the broker can exit if there is a circuit in mid and small cap shares.
