It is not just Karvy Stock Broking Ltd, which was banned by market regulator, the Securities and Exchange Board of India (Sebi), that relied heavily on bank loans. A Mint analysis, based on the charges created on assets of brokerage firms, shows lenders extending credit limits of over 9,000 crore for the top 15 brokerages.

The exposure, however, acts as a proxy for the amount of the loans on their books, since the amount might not have been completely utilized or disbursed to brokerage firms. Brokers typically use loans from banks and non-bank lenders for working capital requirements and to fund clients for their capital market exposure. Since Zerodha Broking Ltd, Sharekhan by BNP Paribas, HDFC Securities and RKSV Securities do not have any charges registered, the first 19 top firms were taken into account.

Graphic by Paras Jain/Mint
Graphic by Paras Jain/Mint

According to the Registrar of Companies (RoC), Motilal Oswal Financial Services Ltd has the highest sanctioned credit limit of 1,835 crore, followed by ICICI Securities Ltd ( 1,500 crore) and Karvy Stock Broking Ltd ( 1,415 crore).

Companies that responded to Mint queries said they do not pledge client securities for loans.

“Typically, borrowed funds are used for execution of margin trading facility (MTF) by brokers," said Jaideep Arora, chief executive, Sharekhan by BNP Paribas, adding that, though, brokerage firms are allowed to borrow from banks and non-banking financial companies (NBFCs), they cannot pledge client securities for it.

A top brokerage executive said, requesting anonymity, that banks typically create a floating charge on the book debts and receivables of these companies to sanction a credit limit. However, he added that not all loans and, especially, those against pledged shares, reflect in RoC data. “The charges registered might not give the complete picture as a lot of borrowing is done by pledging shares in the NSDL (National Securities Depository Ltd) system. In such cases, charges are not registered, but a pledge is created in the demat system itself."

Experts said while such loans typically have a collateral of double the exposure, any further Karvy-like incident could put pressure on lenders saddled with more than 9.5 trillion of sticky assets.

“It is beyond doubt that such exposures may have a greater amount of risk associated with it than ordinary loans, despite being backed by collateral (shares or receivables)," said Anil Gupta, sector head, financial sector ratings, ICRA Ltd.

The brokerages clarified that since sanctions are not on their books unless utilized, it would not be correct to say that the quantum of charge is equivalent to the loans.

An ICICI Securities spokesperson said all brokers need to keep margins with exchanges to trade on their platforms. “This is typically funded using a combination of their own funds, consideration paid by clients, or even borrowings from the market," he said, adding that it also borrows funds via commercial paper by planning for expected business volumes and other planned demand for funds. However, there may be a temporary or one-off requirement and, to deal with such scenarios, brokers need to be always ready for sudden funding requirements and they typically also keep a credit line as a backup with one or multiple banks.

Market experts said typically, brokers use borrowed funds for margin trading.

In MTF, stocks are bought using money collected from the investor and the brokerage. In August 2017, the Securities and Exchange Board of India (Sebi) allowed stockbrokers to borrow through commercial paper and unsecured loans from directors and promoters to offer MTF to their clients.

Earlier, a brokerage could use only its own funds or borrow from banks and NBFCs. In the same circular, Sebi had said that a broker will not be permitted to borrow funds from any other source.

Shalibhadra Shah, group chief financial officer, Motilal Oswal Financial Services, said its loan outstanding in standalone financial statement was 1,420 crore and 1,416 crore as on 31 March 2019 and 30 September 2019, respectively.

An Angel Broking spokesperson said the loan amount of 1,378.97 crore is incorrect as the source is index of charges published on the ministry of corporate affairs website. “Currently, our long-term borrowings (vehicle loan) is at around 1 crore and short-term borrowings (working capital loans) is 325-350 crore."