Zerodha's Kamath warns of risks as margin trading loan book surges

As margin trading facility loans cross ₹1.16 trn, Zerodha's Nithin Kamath has cautioned that weak risk frameworks and illiquidity could trigger synchronised liquidations during market corrections

With margin trading facility (MTF) loan books swelling rapidly, Zerodha founder Nithin Kamath has flagged concerns over risk management frameworks at stock broking firms, warning that a sharp market correction could trigger “synchronised liquidations”.

 

As of January 19, the brokerage’s outstanding MTF value had climbed to a record ₹1.16 trillion, up nearly 50 per cent year-on-year and over four-fold over the past four years. The MTF loan book had crossed the ₹1-trillion mark for the first time in September 2025.

 

MTF allows investors to borrow funds from their brokers to purchase securities by paying only a portion of the total transaction value upfront, with the broker financing the rest at an interest cost.

 

With regulatory tightening and curbs on derivatives volumes, several discount brokers in recent years have increasingly pushed MTF as an alternative revenue stream.

 

Kamath argued that risk management in MTF is significantly more complex than in futures and options (F&O), as clients can hold leveraged positions for months and MTF is permitted in over 1,300 stocks, including many illiquid ones.

 

“The structural problem- Indian equities have decent liquidity when markets rise, but it completely dries up during drawdowns. Minimal short-selling (SLB) means almost no natural bid when things reverse. Forced liquidations become self-reinforcing, especially in non-F&O stocks,” Kamath wrote on social media.

 

He also pointed to the risks of layered leverage, noting that stocks pledged as collateral can amplify exposure—for instance, shares worth about ₹1 lakh can be leveraged into an MTF position of up to ₹5 lakh—magnifying losses during market declines.

 

While the Securities and Exchange Board of India (Sebi) caps MTF exposure at 50 per cent of a broker’s net worth and borrowings to limit systemic risk, Kamath said these safeguards primarily protect the system from broker failures, rather than brokers from client defaults.

 

“We haven't seen a 2008, 2015, or COVID-type event since MTF scaled up. When we do, it will cause mayhem—not because any broker fails, but because forced selling into illiquid markets will cascade,” he added.