The margin funding business managed by the NBFC arms of brokerage houses has taken a significant hit in the aftermath of the mid-cap crash that occurred in December 2010. This is because most investors who take the leverage route trade in midcap scrips and many of these counters have become illiquid since December.
According to market observers, the size of the business has shrunk to 1/10th of what it was before the market crash of January 2008.
While the top ten brokerages did an average monthly business of around Rs 20,000 crore before the crash, they funded about Rs 2,500 crore in August last year. That figure has further fallen to just about Rs 1,000 crore in January 2011.
?There is no demand from clients for margin funding. Both brokers and clients have become conservative,? said SA Narayan, executive director at Kotak Securities. Since leverage thrives in a secular and consistent bull market, the volatility in the past six months has impacted the risk-taking ability of investors. ?Brokerages and clients are finding it extremely difficult to manage risks arising out of this volatility,? said Jitendra Panda, senior VP ? retail, Motilal Oswal Securities.
According to market observers, margin trading done by promoters has also reduced considerably. ?There?s a sizeable margin trading business that promoters are involved in. They pledge their shares with brokerages and utilise the leveraged amount to invest in their own business or purchase their firm?s shares,? said a senior official from a brokerage house on the condition of anonymity.
Brokerages have cut down on the list of approved stocks on which clients can borrow money, said Panda. This is especially so in the mid-cap space. Clients are also flocking from the mid-cap to the large cap space and have become active in the derivatives market, where investors can leverage without resorting to borrowing, he said.
?The advantage of trading in the derivatives market is that a client can pay the margin in the form of shares,? said Panda.
Banks lend to NBFCs at around 11-12% per annum and the NBFCs in turn lend to investors at 12-16% per annum, depending on the size of funding. Investors are now feeling the pinch as the liquidity crunch has further pushed up borrowing costs in the past month to as high as 18% per annum.