While this increased risk appetite reflects widespread euphoria among retail investors, market participants are concerned that this increased leverage could cause difficulties in the event of an event like Wednesday’s stock market crash. I’m warning you that there is.
The stock broking industry’s margin trading funds (MTF) book stood at around Rs 29,500 crore in January last year and around Rs 7,100 crore in February 2020, as per data compiled by rating agency ICRA. As of today, it has increased to Rs 54,537 crore.
According to market participants, the main reason for the increase in margin funds is that the market, especially small and medium-sized stocks, has outperformed, leading to more individual investors paying margin to buy stocks.
“MTF is a product associated with bull markets, and retail investors taking leveraged positions in anticipation of a significant rise in the market,” said Dheeraj Leli, managing director, HDFC Securities. “The significant rise in MTF comes with the risk of materializing primarily in the event of a market crash, leading to triggering of margin selling.”Nifty Midcap 100 Index and SmallCap 100 Index have increased by 29% each in the last six years. It rose by 36%. In Nifty50 he increased by 10%.
Many brokers offer MTF functionality for around 1,000 stocks. MTF is a financial product that allows investors to leverage broker funds for trading in the spot market. Depending on the risk profile of the customer, the broker charges him an interest rate ranging from 7% to 18%. ICICI Securities, which maintains a leading position in the MTF business with around 22% market share, charges a commission of around ₹26 per day. Funding amount is $100,000. ICICI Securities’ MTF book has increased from Rs 6,440 crore in March 2023 to Rs 9,980 crore as on December 2023. Mirae Asset’s MStock offers traders MTF options with interest rates ranging from 6.99% to 9.99%.
“With leveraged positions increasing significantly, it remains to be seen whether the industry will be able to manage the heightened risks during periods of market turmoil,” said Karthik Srinivasan, senior vice president at ICRA.
“Nevertheless, MTF loan exposure is highly diversified across over 600 financial instruments with at least JPY 100 billion in funding, and the maximum exposure to a single financial instrument is more than the total MTF exposure at an industry level. It’s less than 2%, which is reassuring.”
With the rapid expansion of MTF books, the outstanding amount of commercial paper (CP) borrowings of major securities intermediaries extracted by ICRA has increased to a record high of 4500 billion yen, accounting for 11% of the total CP outstanding as of November 2023. occupied. Two years ago it was 2%. The broker borrows funds through his commercial paper to fund his MTF book.