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Devina Mehra, a fellow guest columnist for Mint, recently laid out something that deserves a wider audience. She has tracked the growth of the Margin Trading Facility with precision, and the numbers are striking. The total MTF book has grown by nearly 59 per cent since April 2025, from under Rs 70,000 crore to approximately Rs 1.1 lakh crore. More troublingly, a significant portion of these borrowed positions sits in relatively illiquid stocks, where MTF outstanding is many times the daily trading volume.
I want to pick up from where she leaves off, because I think the MTF story is a window into a larger regulatory blind spot.
Suggested read: A black hole for your money
Financial regulation is designed to protect individuals. Each investor gets warnings. Each borrower faces margin requirements. These rules are aimed at one person at a time. The underlying assumption is simple: if each individual is adequately protected, the system is safe.
The assumption is wrong.
Market crises don't happen because individuals take too much risk. They happen because many individuals take the same risk at the same time. When margin calls arrive together, individually rational decisions aggregate into a collective catastrophe. Each borrower sells to meet the requirement, exactly what they should do. But when thousands do it simultaneously, the system breaks down.
Let me give you a concrete example. Imagine ten thousand investors, each holding Rs 10 lakh in a small-cap stock using MTF. The market falls 10 per cent. Their brokers call. Each investor sells to meet the margin requirement. But here's the problem: the stock's daily trading volume is Rs 50 crore, and the collective selling pressure is Rs 1,000 crore. The price collapses. The circuit breaker hits. The exit door locks. Every single investor followed the rules. The system failed anyway.
For those with a long enough memory, this is exactly what made the 2008 crisis worse with every passing day. Lehman Brothers collapsed. Every bank holding mortgage-backed securities tried to sell simultaneously. No bid appeared. Prices froze, then crashed. The mechanism was different. Mortgages then, equity MTF now, but the pattern is identical.
Suggested read: True and false lessons from the 2008 crash
So why did MTF get this large?
MTF is a legitimate facility that allows investors to borrow against their existing securities to fund further purchases. There is nothing inherently wrong with the product. The problem is how aggressively it has been sold, and to whom.
Brokers earn interest on MTF loans, typically ranging from 14 per cent to 25 per cent per annum, depending on the arrangement. This creates an incentive structure familiar to anyone who has watched Indian financial services for any length of time. Brokers have found a product that generates recurring interest income, and the marketing machinery has been pointed squarely at retail investors who have no business being in leveraged positions.
In an earlier column, I wrote about what drives pre-market panic when bad news breaks overnight, as it always does nowadays. The answer was leveraged investors — people who have borrowed to hold positions and for whom every hour of delay is a genuine emergency. They are not irrational. Given their financial structure, selling fast is the only logical move.
There is a partial acknowledgement of this risk in the RBI's new rules, effective April 1st, which tighten the collateral requirements for banks funding broker MTF books. Banks are now required to maintain 100 per cent collateral against MTF loans, with at least 50 per cent in cash. This is a belated recognition that the party had been allowed to run too long.
But here's the irony: a regulatory tightening that forces brokers to shrink their MTF books rapidly is itself a source of forced selling. The cure can accelerate the disease.
For the ordinary investor reading this, the practical message is simple. MTF is a facility being marketed to you by people whose financial interests lie in getting you to use it. If you are building wealth steadily through SIPs and long-term equity holdings, it has nothing to offer you.
The Rs 1.1 lakh crore sitting in leveraged positions is not your problem to solve. But when it unwinds – and it will unwind at some point – your portfolio will take a hit. You will see a 15 per cent or 20 per cent fall for reasons that have nothing to do with the quality of the companies you own. That is the cost of being in the same market as the herd. Knowing why the market is falling is not the same as needing to do something about it.
Also read: The short-term trap
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