Zerodha CEO Nitin Kamath has warned on the risks of increasing margin funding in India, citing the volatility of the South Korean market. He said a big fall in the market could lead to widespread selling in small and medium stocks.
New Delhi [भारत]July 29 (ANI): Zerodha Founder and CEO Nitin Kamath on Wednesday said the sharp rise and fall seen in South Korea’s stock market has highlighted the risks associated with increasing margin funding in India. He warned that a major decline in the market could lead to widespread selling in small and medium stocks.
In a post on X, Kamath described developments in the Korean market as his “biggest nightmare” as a broker. He said the rapid growth in margin trading facility (MTF) books across the industry has significantly increased market risks. “My biggest nightmare as a broker is what is happening in the Korean markets right now. The source of my nightmare is that our MTF book is growing along with the entire industry,” Kamath said.
He further said that Zerodha’s MTF book of Rs 9,000 crore is “its largest exposure since it was launched in 2010.” According to Kamath, the main concern lies in the structure of the firm’s MTF portfolio, with almost half the exposure concentrated in non-F&O stocks, which may hit lower circuits for several sessions, making it difficult to exit during sharp market declines.
How does margin funding risk work?
Explaining the risks, Kamath said a strong market rally often leads to an increase in leverage as the value of pledged collateral increases, allowing investors to borrow more. However, when the market reverses, falling collateral values trigger margin calls, resulting in forced selling that can further accelerate the market decline. “When markets fall, things get really ugly. The first round of selling is short, but as the value of collateral and margin fall, margin calls increase, leading to forced selling… This decline becomes a self-reinforcing loop until things stabilize,” he said.
What happened in the South Korean market?
The comments come as South Korea’s benchmark KOSPI index has seen extreme volatility in recent months. After rising more than 60 per cent between April and June, the index fell sharply by more than 35 per cent last month amid heavy selling. The benchmark is currently trading around 5,663, and this sharp reversal has drawn attention to the risks associated with leverage-driven rallies and forced deleveraging during market downturns.
India’s situation and role of SEBI
Kamath noted that India’s MTF market has grown rapidly only in the last three to four years and has not yet experienced the sharp decline seen in South Korea following the COVID-19 pandemic. He cautioned that although MTFs are a relatively small part of India’s total market capitalization, a major decline in domestic equities could put severe selling pressure on many small and mid-cap stocks, as brokers currently offer MTFs on about 1,500 stocks.
However, Kamath credited markets regulator SEBI for curbing excessive leverage in India. “Fortunately, thanks to SEBI, we have been spared the worst excesses that typically arise from uncontrolled leverage,” he said. (ANI)
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