Nitin Kamath, founder of Zerodha Broking Ltd., India's second-largest brokerage firm, warned that the sharp growth in margin lending business could pose a danger in case of a significant market downturn, despite this activity increasing the company's revenue.
In his annual client letter on Wednesday, Kamath stated: 'While we are fine, we could be pulled down if there is a market contagion due to this leverage.' He also noted that the interest income generated from clients using leverage accounts for 10% of the total revenue. Kamath emphasized: 'MTF is scary!'
Kamath, who, along with his brother Nikhil, pioneered low-cost brokerage services in India, has repeatedly expressed concerns about clients using margin loans to open positions in the Indian stock market, which is valued at $5.2 trillion. As of Tuesday, outstanding margin loans amounted to ₹1.43 trillion ($15 billion), a 53% increase from last year.
This warning came amid small investors across Asia suffering from speculative rates associated with the rapidly developing artificial intelligence trading. Investors in South Korea, Taiwan, and China experienced particular difficulties, where many were forced to reduce positions due to extreme market volatility.
According to Kamath's data, Zerodha's trading platform book inventory grew to approximately ₹900 billion in August. The brokerage firm reported that clients utilized about ₹600 billion for equity investments, equivalent to roughly a quarter of the firm's net worth. For the fiscal year ending in March, the private company reported a 1% increase in annual profit to ₹428 billion, while revenue growth remained almost unchanged.
Kamath concluded that the 'bull market has clearly paused,' adding that 'the pace of new user growth and overall activity has significantly slowed down.'