Liquidity is a concern for markets

Despite the 515-point rise in the markets on Friday, concerns about tightening liquidity are weighing the markets down. Brokers say that availability of credit to invest in the markets and the cost of the same have drastically changed in the last fortnight.

While investors and brokers had easy access to credit for equity investments till last month, with the big fall in the markets, banks and other financial institutions are reluctant to offer credit.

"The cost of borrowing has suddenly gone up. The economics of borrowing and allowing a client to pay later suddenly has changed," said Manish Kanchan, chief executive officer, Ambit Capital.

Retail banks and brokers have been offering attractive margin funding options to clients in the last 24 months. Several banks also have tailor made products exclusively for small investors and day traders.

Earlier, processing of these products had quick turnarounds, but now neither banks nor customers are pushing for this, say distributors of financial products.

"We have tried to move many of our clients to slightly safer territories like mutual fund investments. Earlier, we used to also suggest some credit products so customers could buy stocks directly in the market," said a relationship manager at a retail bank.

Investors were also using the personal loan route to invest in equities. This was especially so in case of employees eligible for preferential allotment when their employers went public. Profits on several of these scrips have now been wiped off but the burden of EMI payment remains.

Says Vijay Basrur, who took a personal loan at an interest rate of 10 per cent to invest in equities, "I don't know what is the best course of action now. Should I hold on to these scrips and continue to pay the EMI in the hope that markets will return to normal in a couple of months time or should I sell out at current levels and just repay the loan? With markets looking so volatile there is no easy course of action."

Brokers say that even though the large margin call pressures that shook the markets in May have eased off, nobody is willing to risk any increase in margin exposure.

"We are only taking buy orders with upfront payments, even from some of our oldest and most reliable customers. This is despite the fact that most brokerages are seeing their turnover and volumes reduce dramatically. We would rather have no business than take on risky business now," said the head of a broking house with a large retail presence.