Homemarket News

    This is the big challenge before Indian brokerage industry, according to Zerodha's Nithin Kamath

    This is the big challenge before Indian brokerage industry, according to Zerodha's Nithin Kamath

    This is the big challenge before Indian brokerage industry, according to Zerodha's Nithin Kamath
    Profile image

    By CNBC-TV18  IST (Updated)

    Mini

    A blog post on Zeordha's Z-Connect has raised a pertinent question in relation to the future of the brokerage industry in India.

    A blog post on Zeordha's Z-Connect by founder and chief executive officer Nithin Kamath has raised a pertinent question in relation to the future of the brokerage industry in India. Titled "The Race to Zero — Can the Indian brokerage industry survive?", the post discusses challenges in front of the industry after a new regulation that doesn't allow brokerage firms to pledge client securities to a non-banking finance company (NBFC) or any third party went live in India from October 1.
    Why it matters?
    The rule prevents brokerage firms to offer margin funding. For stock market beginners, margin funding allows clients to buy stocks for more money than what's in their account, and charge for the shortfall. Margin funding allowed brokerages to keep the unpaid securities in their own account, and in turn, pledged it to another NBFC to raise funds.
    Where does it stand? Going forward, under the changed regime, brokerage firms can only lend to the extent of their own capital. The new regulation not just reduces interest earnings but also raises the cost of borrowing, particularly for traditional brokerages, which were earlier able to leverage stock as collateral. Moreover, the limits on funding will be related to the profitability and size of the business.
    The big picture: Yet another hurdle for brokerages to leverage balances lying in a trading account is India's quarterly settlement rules, which require them to send back any unused balance back to the client's bank account, depriving them of interest income. In the US, most brokerages have internal rules set saying that they will not send back any money to the client's bank without a fresh Know Your Customer (KYC) if there was inactivity for a quarter, exactly opposite of what India has. It helps US brokerage firms earn billions of dollars on idle client float.
    Indian capital markets also lack a large professional advisory ecosystem like in the US to help their clients survive volatility. A bigger challenge in this regard is to address the significant conflict of interest as financial advisors are also often a distributor of products.
    Check out our in-depth Market Coverage, Business News & get real-time Stock Market Updates on CNBC-TV18. Also, Watch our channels CNBC-TV18, CNBC Awaaz and CNBC Bajar Live on-the-go!
    arrow down

      Most Read

      Market Movers

      View All
      CompanyPriceChng%Chng