There is a quiet build-up of leverage in the Indian stock market that deserves far more attention than it is getting.
The Margin Trading Facility (MTF) book surged 42.9% in the year through January 2026 to ₹1.20 trillion even as the markets turned volatile, according to a February Care Edge report. A meaningful share of these borrowed positions is concentrated in relatively illiquid stocks, where MTF outstanding is several times the daily trading volume.
This is not merely a story about rising leverage. It is a window into a larger regulatory blind spot.
The false assumption
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.
Liquidity illusion
Consider a simple example. Imagine 10,000 investors, each holding ₹10 lakh in a small-cap stock using MTF. The market falls 10%. Brokers issue margin calls. Each investor sells to meet the requirement.
But the stock’s daily trading volume is ₹50 crore, while the collective selling pressure is ₹1,000 crore.
Prices collapse. The circuit breaker hits. The exit door locks.
Every 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.
Incentive problem
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% to 25% per annum, depending on the arrangement. This creates a familiar incentive structure. 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 often does. 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 1 April, which tighten the collateral requirements for banks funding broker MTF books. Banks are now required to maintain 100% collateral against MTF loans, with at least 50% in cash. This is a belated recognition that the party had been allowed to run too long.
But here lies 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.
What it means for you
For the ordinary investor, 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 ₹1.20 trillion 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 may see a 15% or 20% 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.
Dhirendra Kumar is founder and chief executive officer of Value Research, an independent investment advisory firm