Margin funding goes for a toss after market fall

Margin funding by brokerage houses, which allows the investors to take leverage positions in the stock market, has come down by over 65 per cent following the sharp 20 per cent cut in the benchmark indices.

BUBBLE BURST

NBFCs "� most of whom are subsidiaries of their broking units "� made a killing by lending money to investors at an interest rate of 18-25 per cent for the purchase of shares

Margin funding reached unparalleled proportions as the market peaked at 20,000-plus levels

The total turnover (derivatives and cash) on NSE alone has come down by 50 per cent since the January peak

During the run-up in share prices in the last three years, the non banking finance companies (NBFCs) "� most of whom are subsidiaries of their broking units "� made a killing by lending money to investors at an interest rate of 18-25 per cent for the purchase of shares.

While the NBFCs earned high interest rates, their broking arms benefited from commissions earned from the share transactions.

Margin funding reached unparalleled proportions as the market peaked at 20,000-plus levels. Investors asked for more finance from NBFCs by using the shares purchased with borrowed money. This led to a bubble-like situation as investors were induced into paying more for a stock than its fundamental value.

Margin funding trades were responsible for the huge volumes generated in recent times.

The total turnover (derivatives and cash) on NSE alone has come down by 50 per cent since the January peak.

"Either margin funding has come to a standstill or there is much lower activity," said an executive in a broking outfit.

Investors typically bring in some portion of money to purchase shares, while the broking outfit (through its NBFC) finances the remaining amount. The shares are kept in the name of the NBFC.

In a rising market, when an investor chooses to book profits, he gets his portion of the contribution and the gains. The broking firm takes home his funds and the interest rates.

"When the market crashed, the entire system collapsed like a pack of cards," explained a dealer, while stressing that the margin funding market was still alive and kicking. There is a "liquidity crisis" as several brokerage houses took big hits in the crash, he added.

Some top brokerage houses, in a bid to increase their business, were aggressively pushing margin loans to the retail clients until recently. They are either going slow or have put a complete full stop now, after having piled up huge non performing accounts (NPAs).

Conservative estimates put the size of the margin funding market at Rs 10,000 crore. Big names in margin funding include Motilal Oswal Securities, Kotak Securities, Indiabulls and Religare Securities.

Many investors ignored the catch that a margin loan could be called back at any time.