Pledging of securities to get collateral margin

I have two queries regarding the process of Pledging at Zerodha (or any broker in general):

  1. From what I understand, When we get collateral margin by pledging of securities, it is like borrowing money from the broker to trade. So just as banks charge interest for taking loans, does Zerodha charge any interest for the collateral margin they provide us?. And if no, then why not?

  2. How does the process of pledging work internally? Let’s assume a person has 1 Crore in HDFC Liquid Fund (Cash component). So the collateral margin that one can get by pledging this will be Rs 90 Lakhs (After 10% Haircut). So how is Zerodha able to fund/provide a margin of Rs 90 Lakhs? Is there a bank behind the scenes that lends this margin to the users on behalf of Zerodha.

I will try to explain from what i know, i may be completely wrong, but bear with me for a minute.

  1. Pledging of securities: These securities are approved list by NSE that one is able to pledge to the broker where the broker provides margin to take trades. As the margin is not given to do anything else, the broker and NSE will have to earn from the trading you do pledging your security.

Banks charge interest when you take money to do something else. Let’s take example of credit card. Banks extend you line of credit till the end of cycle free of cost. They will gain from the transactions you do using that credit card. Well if you dont pay the bill in due date you will be charged hefty interest. Also when you withdraw money from ATM using the said credit card you’ll have to pay interest.

Just like that when you pledge your security and do trades, you are making them money from trading activity. When your margin goes negative you will be charged interest on the outstanding amount.

If you use it wisely you can also benefit while benefiting them.

Pledging for collateral is not like cash where you can buy in CNC or buy options. It is beneficial only if you are intraday, futures trader or option seller.

I dont know how it works internally to explain in detail. But i think you pledge your security with Zerodha so Zerodha is the bank here.

This is a good thread relating to the topic, if you have time go through this, it might help you in clearing some other doubts.

The broker can benefit from any fees/charges on the trades the client carries out with the margin.
If the client was not provided such a margin (for pledging holdings),
the client might not have participated in few trades,
and thus the broker would not have received the additional fees/charges.

The broker often utilizes their own funds to sponsor the additional margin for the client.
(How the broker raises such funds/capital is not of particular interest to individual clients.)
Update: TheGouda’s answer below, sheds some light on this.

The brokers reduce their own risk in this scenario
by gaining the ability to…

  • levy monetary penalties on the client
  • sell-off any/all the pledged shares

…if the client fails to meet the margin requirements.

Thus, a margin on pledged securities…

  • is like a loan from the broker to a client.
  • for the purpose of trading only.
  • secured by the pledged securities as collateral.

When you pledge shares with a broker, they’re in turn pledged with a clearing corporation that provides the collateral margin. Since the broker’s money is not utilized, interest isn’t levied on this collateral margin. Brokers usually charge a minimum amount per pledge request. The cost of pledging at Zerodha is Rs 30 + GST per pledge request & there is no cost for un-pledging. Read more about pledging at Zerodha here.