MTF risks grow as India brokers hit leverage limits

A warning as markets trade in a narrow range

Zerodha founder and CEO Nithin Kamath has flagged a growing risk in India’s broking ecosystem: the rapid build-up of margin trading facility (MTF) exposure even as equity indices have “largely moved sideways” in recent months. In posts on X and LinkedIn, Kamath said this combination can be dangerous if the market sees a sharp correction, because leverage keeps building without the support of broad-based price momentum. He argued that MTF can look like “easy money” for brokers, but the real test comes on a single bad day when forced selling meets weak liquidity.

Kamath contrasted India’s situation with markets such as South Korea, where investors borrowed heavily during a strong rally. He noted that the Korean market example involved a sharp rise of about 150% over a year, while India’s market action recently has been more range-bound. His core point was that leverage expansion without a strong trend can still create systemic stress, particularly when the underlying stocks are not liquid enough to be sold quickly during a downturn.

What exactly is MTF and why it has expanded

MTF allows investors to buy shares by borrowing funds from their broker, using pledged shares or cash margin as collateral. Kamath said MTF has grown rapidly over the past two years as retail participation increased and investors sought leverage to boost returns, including in mid-cap and small-cap stocks. In another post, he described MTF as a leveraged product where investors must account for both risk and the drag from interest and brokerage costs, especially over short holding periods.

He also highlighted structural differences between MTF and futures and options (F&O). Unlike derivatives, where positions are marked-to-market daily and tend to be shorter term, MTF positions can be held for months. And while F&O activity is concentrated in a smaller set of the most liquid stocks, Kamath said MTF is permitted in over 1,300 stocks, including many that can become illiquid under stress.

Why sideways markets make leverage stand out

Kamath’s concern is that the MTF “book” is expanding across brokers even though the broader market has been going “nowhere”. When prices are stable, borrowers can remain comfortable carrying leveraged long positions for longer, allowing loan books to swell quietly. But if a correction arrives, the same positions can face margin calls and forced selling across the market at the same time.

He also pointed to competitive dynamics among brokers. In his view, competition encourages a “race to the bottom” where brokers offer maximum permissible leverage to avoid losing clients. This can reduce the incentive to run more conservative risk limits, even when the underlying stocks are not suited to rapid liquidation.

The core risk: illiquidity during sharp falls

Kamath said the biggest risk in MTF shows up when stock prices fall quickly and pledged shares cannot be liquidated fast enough to recover the borrowed amount. He described a scenario where if a stock moves beyond the customer’s margin, the remaining loss sits with the broker as a “bad debit”. He used an illustrative number: if the stock declines more than the margin provided, say 20%, the broker bears the deficit and recovering that amount from clients can be difficult.

He also argued that Indian market liquidity often looks healthy on the way up but can dry up during drawdowns. With limited short-selling through the securities lending and borrowing (SLB) mechanism, he said there may be “almost no natural bid” when markets reverse. In such conditions, forced liquidations can become self-reinforcing, especially outside the most liquid stock universe.

Layered leverage: when collateral becomes a multiplier

A key part of Kamath’s warning was about layered leverage when investors pledge shares to create additional buying power. He gave a specific structure: a customer pledges Stock A, receives about 80% margin on it, and then uses that collateral to take further positions worth 400% in the same stock. In another illustration, he explained that shares worth around Rs 1 lakh could generate roughly Rs 80,000 of collateral margin after haircuts, which can then be used to build an MTF position of up to Rs 5 lakh.

Kamath warned that these structures become especially risky in mid-cap and small-cap names. If circuit limits hit during a sudden fall, brokers may be unable to exit positions, leaving them exposed while prices keep adjusting lower through restricted trading sessions.

Why non-F&O exposure matters

Kamath said nearly 50% of the industry’s MTF exposure is in non-F&O stocks. These counters are typically less liquid than large-cap F&O names and can be harder to sell quickly in stressed markets. He connected this to the practical risk for brokers: if positions cannot be liquidated due to low liquidity or circuits, the broker’s ability to recover financed amounts becomes uncertain.

He also noted that some brokers currently do not allow certain practices, such as using collateral margin to buy MTF, but competitive pressure could force them to allow it over time. In his framing, this is not only a customer-risk issue but also a broker balance-sheet issue if losses crystallise faster than they can be recovered.

Key numbers Kamath cited on MTF build-up

Kamath said MTF has expanded nearly five-fold over the last four years to more than Rs 110,000 crore in outstanding exposure. Another data point referenced in the same context puts the industry’s outstanding MTF value at about Rs 116,000 crore as of January 19, after rising nearly 50% year-on-year and more than four-fold over four years. The MTF loan book also crossed Rs 100,000 crore for the first time in September 2025.

He added that Zerodha’s own MTF book has grown significantly over the past 16 months but remains around 25% of the company’s net worth. For some brokers, he said MTF exposure could be as high as 500% of net worth, which he described as the maximum limit allowed by regulators.

Costs and funding pressure: interest and brokerage add up

In a February 18 post, Kamath said investors often underestimate the combined impact of interest and brokerage charges when using MTF, particularly over short holding periods. He shared an example framework: a Rs 10 lakh equity purchase funded with 50% borrowing (Rs 5 lakh) and held for 30 days, with the comparison focusing on interest and brokerage charges. His point was that brokerage structures can materially shift breakeven levels even when headline interest rates look similar.

He also said in a February 16 post that new RBI rules would raise funding costs for brokers, and that these costs would “eventually be passed on to customers”. In his view, higher costs and rising leverage can interact during volatile periods by tightening margins for both clients and brokers.

Market impact: why brokers and investors are watching MTF closely

Kamath’s warning comes at a time when cash market volumes have slowed after last year’s rally, while leveraged products, including derivatives and MTF, continue to see elevated activity. His emphasis was on broker-level risk in a fast correction: if many clients face losses at the same time and pledged stocks cannot be sold due to illiquidity or circuits, brokers can be left with unrecovered deficits.

He argued that SEBI’s MTF caps are designed to prevent broker failures at a system level, but may not fully protect brokers from client defaults during disorderly market falls. He also noted that India has not seen a 2008, 2015, or Covid-type shock since MTF scaled up to current levels, which leaves the ecosystem’s behaviour under extreme stress less tested.

Conclusion

Kamath’s message is that rising MTF leverage has created a structural risk that becomes visible only in a sharp drawdown, especially when positions are concentrated in less liquid non-F&O stocks and amplified by collateral-based leverage. He has also highlighted the role of costs and funding conditions, arguing that interest and brokerage can shift breakeven levels and that higher broker funding costs could be passed to clients. The next major stress event, whenever it occurs, will test whether broker risk frameworks and liquidation mechanisms can handle synchronised selling without cascading losses.