Brokers’ borrowing costs from NBFCs for margin funding have surged to 10-11% from 8-8.50% earlier. Industry officials ET spoke to attributed the decision to increase loan rates to brokers to two reasons. One is that the Reserve Bank of India nudged NBFCs to do so amid concerns about elevated leverage in the stock market.
An email query to RBI went unanswered till print time.
The other is that finance companies voluntarily raised borrowing costs for brokers as part of their risk-tightening measures following the central bank’s recent crackdown on JM Financial Products.
The total quantum of margin funding was around ₹57,000 crore at the end of March.
A senior official from an NBFC told ET that they have raised interest rates on loans to brokers by 250 basis points following a recent crackdown on a few lenders due to regulatory non-compliance and governance issues.
Stock brokers use various sources of funding to finance their margin funding facility. These include using their own funds, borrowing funds from scheduled commercial banks or NBFCs regulated by the RBI, and borrowing funds through the issuance of commercial papers (CPs) in the debt market.The Margin Trading Facility (MTF) book for the stockbroking industry has increased to ₹29,500 crore in January 2023, from ₹7,100 crore in February 2020.
The primary reason for the increase in margin funding is the outperformance of the market, particularly in mid-cap and small-cap stocks, which led to more individual investors taking a loan and buying shares to maximise returns.
With the stock market considered overheated after the recent run-up, various market participants worry that equities could be more vulnerable to any sharp selloff.
Some brokers have begun increasing interest rates on margin funding ahead of the elections.
“A few brokerages have already raised margin funding rates in anticipation of heightened volatility ahead of the elections, while the rest are expected to follow suit soon,” said Prasad Sawant, advisory head at IIFL Securities. “This move is a precautionary measure aimed at allowing retail investors to deleverage their positions ahead of the elections to mitigate any potential crises.”
According to Ashish Nanda, joint – digital business, Kotak Securities, brokerages increase margins and reduce leverage during such periods to guard against volatility which increases closer to the election results.
“While we haven’t changed any risk parameters currently, we monitor volatility closely and we will take appropriate actions if the need arises.”
