The Indian flag flies in the wind in New Delhi. [Getty Images]
The Indian flag flies in the wind in New Delhi. [Getty Images]

As South Korea's stock market stands as a cautionary tale of excessive leverage, analysts warn that India's equity market faces a similar threat as retail investors rapidly pile into debt-fueled investing.

Bloomberg published a column Friday titled "Korea's Leverage Trap Is Playing Out Again in India," diagnosing that "Indian brokerages are aggressively extending margin credit to retail investors, amplifying systemic risk across financial markets."

According to the National Stock Exchange of India last month, margin trading funding, or MTF, has swelled to around 1.38 trillion rupees ($14 billion). MTF is a credit trading service that allows investors to buy shares by putting up only a portion of the total purchase price as collateral, with the remainder borrowed from a brokerage.

India's MTF volume remains small relative to the country's stock market capitalization of roughly $5 trillion, and amounts to only about half the peak balance of South Korea's margin financing. Still, the pace of growth is drawing concern — retail investors' borrowing has surged 50 percent from a year ago.

Bloomberg said "upstart digital brokerages are aggressively expanding credit offerings to customers as they compete with established firms," adding that "retail investors and high-net-worth individuals are borrowing at record levels to invest, and the pace of leverage expansion is reaching increasingly dangerous territory."

Penny stocks, not blue chips: India's riskier debt-investing problem

[AFP]
[AFP]

Unlike South Korea, India's stock market has not been propelled by an AI infrastructure investment boom. In fact, the country's major share indexes have been among the worst performers among major global markets this year.

Yet India shares one trait with South Korea: leverage is expanding in the ETF market. While South Korea's leveraged ETFs carry a built-in borrowing structure, Indian investors are taking out margin loans to buy ETFs, analysts observe.

Particularly notable is that margin financing is flowing broadly into low-priced and small- to mid-cap stocks recommended by so-called "finfluencers" — financial influencers — rather than into quality blue chips. Analysts say the streamlining of margin trading procedures, which now allow share purchases and collateral registration to happen simultaneously, along with retail investors' fear of missing out, or FOMO, has further fueled debt-driven investing.

Margin trading in ETFs targeting India's precious-metals investment boom surged 15-fold in a single year, and some equity ETFs have seen margin financing account for 30 to 50 percent of their fund size.

Bloomberg said that "the normalization of mobile-based stock trading has significantly lowered barriers to margin credit, and brokerages are actively expanding it to attract customers," adding that "with inflation expectations exceeding 9 percent, the perception that a deposit rate of around 6 percent annually cannot preserve wealth has spread, further stoking demand for leveraged investing."

The borrowing is dispersed across thousands of small, short-term loans, limiting the credit risk of any individual brokerage. But analysts warn that if forced selling begins in earnest, the shock could spread across the entire market.

Bloomberg said "India's margin trading expansion is not driven by expectations of corporate growth, but by retail investors propping up stocks that foreign investors are shunning with borrowed money," and warned that "if the current expansion of margin trading continues, the eventual unwinding of margin loans could deliver a far bigger shock than a simple market correction."


yckim6452@heraldcorp.com