Zerodha CEO Nithin Kamath Warns Margin Trading Could Trigger Stress In Sharp Market Correction

Zerodha founder and CEO Nithin Kamath has cautioned that the brokerage’s rapidly expanding margin trading facility (MTF) business could expose it to greater risks if Indian stock markets experience a sharp correction.

According to a report by Bloomberg, Kamath, in his annual message to customers marking Zerodha’s 16th year, said the company’s MTF exposure had increased substantially.

While lending to clients buying stocks with borrowed funds has boosted interest income, a major market downturn could trigger forced selling and create additional pressure on the business.

Rising leverage raises market correction concerns

Zerodha’s MTF book stood at around ₹9,000 crore in August, with customers borrowing approximately ₹6,000 crore to fund their equity purchases. Kamath said interest earned from financing leveraged positions now accounts for about 10% of Zerodha’s revenue.

The growing use of leverage is not limited to Zerodha. Investors across India borrowed a record ₹1.36 lakh crore through MTF by July, even as activity in the cash market moderated.

A sudden fall in share prices could result in margin calls, forcing leveraged investors to sell their holdings. Such selling could further depress prices and create a feedback loop, particularly in small- and mid-cap stocks where lower liquidity can make it difficult to exit positions quickly.

SEBI also focuses on MTF risk management

The risks surrounding margin financing have attracted regulatory attention. In June, SEBI proposed changes to the MTF framework, including higher net-worth requirements for brokers and broader funding options, with the aim of strengthening risk management.

Kamath has also advised investors to consider interest costs, brokerage charges and taxes when calculating returns from leveraged trades, as these expenses increase the price required to break even.