Market volatility and high interest costs are preventing high net-worth individuals (HNIs) from taking the leverage route. This has impacted the margin financing business run by the NBFC arms of brokerage houses.
According to market observers, the size of the margin financing business today stands at just about 10% of what it was before January 2008, when benchmark equity indices touched an all-time high. While the top-10 brokerages did a business of around R20,000 crore before the crash, they funded about R2,500 crore in August last year. That figure has further fallen to just about R2,000 crore this year.
?Clients are currently not actively taking to margin financing for trading because of the high interest cost and persistent volatility in the market,? said Jitendra Panda, head of broking at Future Capital Holdings. Margin financing is resorted to by delivery-based traders or HNIs with an investment horizon of 3-4 months. HNIs often take the leverage route to trade in mid-cap scrips and many of these counters have either become illiquid or too volatile to trade in. Margin financing not only adds to the interest income of brokerages but also helps to increase their broking revenues by raising the higher-yielding cash volumes.
Margin calls are typically taken in a trending or one-sided market, said market participants. ?In a trending market, investors keep increasing their funding book gradually,? said Prasanth Prabhakaran, president ? retail broking, IIFL. For instance, if a share purchased at R100 rises to R120, the gain of R20 will be leveraged as well. ?However, the margin book can fall drastically in a volatile market if margin calls are triggered,? said Prabhakaran.
As part of their risk mitigating policy, brokerages have cut down on the list of approved stocks on which clients can borrow. ?Every NBFC has a categorisation of stocks. Like, if it?s a stock from BSE A group, the NBFC might lend up to 80% of its value to the client. The lending amount will vary depending on the group,? said Prabhakaran.