MTF (margin funding) has grown ~5X in 4 years to ₹110k+ crores, especially after F&O margins and STT increases. But there’s something nobody’s talking about: there is no real risk model in play for brokers.
Regulations allow up to 5X leverage (20% margin) on many stocks. Competition forces every broker to offer maximum permissible leverage. If you don’t, you lose business. Classic race to the bottom.
Unlike F&O, MTF has several risk multipliers:
Clients hold positions for months vs days
1,300 stocks (many illiquid) allowed vs only the top 200 in F&O
All buy positions vs two-way flow in F&O, making risk management much harder
Much harder to manage risk, given all the above.
By the way, this leverage from MTF becomes insane when you accept stocks as collateral. So, with Rs 1 lakh of stocks, you get a collateral margin of Rs 80k (20% haircut), and with this Rs 80k, you could buy Rs 5 lakh of MTF.
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.
SEBI caps MTF at 50% of broker networth + borrowings (or up to 5x networth) to prevent broker defaults. But this potentially protects the system from broker failures, not brokers from client defaults.
With MTF growing 5X across the industry and everyone at maximum leverage, the next major correction could trigger synchronized liquidations.
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.
This will be significantly worse beyond the top 200-300 stocks due to lower liquidity.
Someone asked me what the risk model is. I said there is none. I mean, there is—if “praying” that stocks don’t fall counts as a model.
My gut says a lot of what’s being earned as interest income, and possibly some capital, of brokers, will all be given back when the market does a quick move down.