Margin funding books plummet 25% in one year

Books of top brokers have shrunk Rs 2,000 crore after RBI's circular last year that NBFCs to keep loan to value of 50%

The market may have moved up more than 10 per cent in the past year but the margin financing books of non-banking finance companies of brokerages have declined by 25-30 per cent. This follows tighter norms introduced by the Reserve Bank of India last August for NBFCs to lend against shares.

Till last year, the margin funding book of top brokers was estimated to be Rs 7,000-8,000 crore. This has now shrunk to Rs 5,000-6,000 crore.

“Clients had the option to bring in additional margin or cut down their exposure. Several of them seem to have opted for the latter,” said Prasanth Prabhakaran, head of retail broking, IIFL. He added that even before the RBI came out with its new guidelines, many large brokers had a margin requirement of as high as 30 per cent, which had been recalibrated to 50 per cent over the past year.

Margin funding is a leveraging tool that allows investors to buy stocks with money borrowed from a broker, using other securities as collateral. This can magnify any trading profit or loss. Last year, the RBI issued a circular stating that NBFCs could no longer lend more than 50 per cent of the value of shares pledged. Also, NBFCs could accept only Group 1 securities, those with an impact cost of 1 or less, as collateral.

Experts said the 50 per cent requirement was on the higher side and had deterred several high net worth individuals from participating in the recent mid-cap rally. Lending rates for margin funding can range 11-13 per cent for  HNIs to as high as 16-17 per cent for other clients.

“We were focussed on SME lending and therefore the impact has been minimal,” said Kavi Arora, CEO, Religare Finvest. According to some experts, the full impact of the new norms will be felt during a sustained bull run as investors typically take to leverage in times of sustained upticks.

BROKERS LOOK BATTERED

• Margin funding book of top brokers shrunk about Rs 2,000 crore in the past one year
• RBI’s circular last year stated that NBFCs could no longer lend more than 50 per cent of the value of shares pledged
• Experts say the 50 per cent LTV requirement is on the higher side
• Higher margins have deterred HNIs from participating in the mid-cap rally
• Lending rates for margin funding are 11 to 13 per cent for large HNIs and 16 to 17 per cent for others
• Increase in contract size in equity derivatives can boost margin trading if clients move to cash market

“The higher margin requirement is a positive for investors in the long run as it will ensure that illiquid stocks are not funded at lower rates,” said Ajay Menon, director, Motilal Oswal Financial Services. Aggressive margin funding can increase market volatility if margin calls are triggered. When share prices fall below a certain level, NBFCs sell the shares against which they lend, leading to a sharp fall in stock prices.

The new RBI norms are not the only reason the books have shrunk. According to Arora, most of the good stocks have moved to the F&O segment, where margin funding requirements are minuscule. The F&O segment contributes to over 90 per cent of the overall market volumes today. A little over 150 stocks are available for trading in the F&O segment, of which about 75 per cent are actively traded.

However, experts believe that market regulator Sebi's move to increase the minimum contract size in the equity derivatives segment to Rs 5 lakh from Rs 2 lakh could indirectly benefit the margin trading business. “Lot sizes of several stocks have risen 2-3 times. Investors who cannot afford to trade large contract values in the derivatives segment may shift to the cash market and leverage via margin funding,” said Siddarth Bhamre, head of equity derivatives and technicals at Angel Broking.