The sustained uptick in equities has given a fillip to margin trading facility (MTF), a product offered by brokers that allows up to 5x leverage to those trading in the cash market.

The MTF book has swelled to ₹80,000 crore, a growth of over 55 per cent in the past eight months, according to estimates. The book was ₹51,000 crore at the end of last year and has grown about 3x since March last year.

While MTF has historically been offered by traditional, bank-based brokers, many more are jumping in the fray, widening its reach, said experts.

“The expansion in MTF book is a function of market growth, and increase in the number of clients trading in direct equities over the last few years,” said Pranav Haridasan, Managing Director & Chief Executive Officer of Axis Securities.

The number of demat accounts stood at 171.1 million, with the addition of 4.23 million new accounts in August.

“MTF has been a growth lever for brokers in this market. Investors have been able to make more money than the interest outflow, enhancing their return on capital substantially,” said Dhiraj Relli, MD & CEO, HDFC Securities.

Varying interest rates

Interest rates charged are 11-12 per cent, but vary. Kotak Securities charges 9.75 per cent per annum on its Trade Free Pro plan. ICICI Direct charges between 9.69 per cent and 20.49 per cent for its Prime Plan. SBI Securities charges zero per cent interest for 23 trading days.

Systemic risk?

Currently, about 1,000 stocks are offered under MTF. The margin requirements vary depending on the liquidity profile and quality of the stocks. Shares are used as collateral and can be sold in the event of a correction.

“The leverage in MTF is lower than in derivatives and the defined margins and limited number of stocks has taken care of systemic risk to a large extent. Stocks offered are mostly large and mid-caps with relatively high liquidity and low impact cost,” said Ashish Nanda, President and Head - Digital Business, Kotak Securities.

In 2016, the regulator defined the minimum possible margin that had to be taken from customers: VAR + 3x ELM for F&O stocks and VAR + 5x ELM for non-F&O stocks.

“It is a collateralised product and the exchange-prescribed margin requirements are quite robust. Brokers sometimes add some buffer of their own,” said Haridasan.

The rise in MTF books may push up financial leverage for brokers, which borrow from banks or go to the market to raise money, capped at five times their net worth.

“The brokers fund this amount in two ways: 50 per cent out of their net worth and the rest by way of borrowed funds. Commercial papers continue to remain the cheapest form of borrowing. The rating and risk appetite is taken into consideration by the institutions and corporates which subscribe to these CPs,” said Relli.

MTF books can be volatile and may shrink in times of correction. A case in point is the crash in Adani group stocks last year, which led to a 30-40 per cent fall in the MTF books of brokers.