broker defaults: Record broker defaults & most demat a/c addition: 2020 lessons for broking industry

In the financial year 2020-21, the nine-month period between July 2020 and March 2021 (9MFY21), was the most challenging time for almost every industry. The prolonged phase of lockdown that was enforced to contain the coronavirus pandemic came as a serious setback for them. Ironically, for the broking industry, this period was marked by unprecedented gains and unparalleled investor enthusiasm.

After facing the initial headwinds, when the lockdown was announced in March 2020 and till the broking industry adjusted to remote and digital mode of operation, several positive factors emerged, which gave the industry new momentum.

Record growth in 2020

First of all, governments globally announced huge stimulus packages to stem the Covid-induced slowdown, with total fiscal stimulus exceeding $12 trillion, which was almost four-times the stimulus offered during the Global Financial Crisis of 2008.

Along with this, the soft monetary policies of global central bankers supported equities. As a result, the benchmark equity indices saw a V-shaped recovery from the bottom across the globe. Notably, domestic equity benchmark Nifty recovered by over 110% from the low of 7,511 hit in March 2020.

A sharp and across-the-board rally in equities enthused a larger group of people, mostly millennial investors, and created a strong positive vibe for stock investing in most markets.

This positive attitude for stock investing became more pronounced also because people had more time to plan and focus on their market moves with the shift to work-from-home mode and restrictions on movement due to the lockdown.

In addition, income through short-term equity trading in a supportive bull market ensured an alternative source of income, especially for people who had faced pay cuts and job losses in other industries.


Technology, capital and manpower strength a must

With a record addition of over 10 million new demat accounts in 2020, which is more than double of what was added in 2019, and a sharp year-on-year increase of 58% in volumes and 61% in turnover, respectively, in NSE’s capital market segment, most brokers reported record profits for the nine-month period beginning the second quarter (Q2) of FY21.

Drawn by this, many new players dabbled into the broking business, especially into discount broking, in the past year. Since investments in shares and debentures still account for just about 4 per cent of gross financial household savings in India and only around 4 per cent of total population currently has demat accounts, the ongoing financialisation process opens up huge opportunities in the years ahead.

However, considering the cyclicality of the broking business and a number of strict measures adopted by market regulator Securities and Exchange Board of India (Sebi) in recent times to ensure fair practices in the industry, it often becomes a challenge for the players to remain afloat, especially during an economic slowdown, like the one witnessed during the pandemic.

Therefore, while the year 2020 was marked by record profits and historic additions in new demat accounts, it also saw the highest number of broker defaults. Notably, 18 brokers defaulted on NSE and 16 on BSE during the year.

The broking business requires immense patience, and must be supported by superior technology, adequate capital and efficient manpower to make it sustainable and resilient in the face of adversities.

Digital transformation, pricing & reach are keys
Going ahead, three key factors will be crucial for the broking industry to drive growth and ensure sustainability, viz. digital transformation, optimal pricing and a wider reach.

In 2020, the rapid digital transformation of broking businesses resulted in easy-to-use, secure and hassle-free trading platforms gaining preference with a wider investor base, especially amongst the millennials. It is now well established that entities with superior digital platforms will likely have an edge over others in future.

Further, the optimal or lower cost of trading that was achieved with the shift to online trading platforms made it easier for individual traders to trade with higher effective trading returns. This benefit will add to the ongoing popularity of digital platforms.

Finally, along with ease of trading and pricing, accessibility and reach are also contributing factors for sustained growth of a broking business. Hence, a business-to-business (B2B) or franchise business model will ensure a wider reach, especially in Tier II and III cities.

Moreover, if these factors are backed by in-house quality research services, it will be an added advantage for any broking firm.

Conclusion: Partners are key

Empowering and educating partners would help broking houses make deeper inroads into the recesses of the country and in tapping a wider customer base.

Since the sharp volume growth in equities that was seen in 2020 is unlikely to repeat in 2021, the industry’s focus must now be on acquiring new customers and reactivating dormant customers to ensure sustained growth. Improving income from non-broking segments must also remain a focus area for brokers.

(Lav Chaturvedi is ED & CEO of Reliance Securities. Views are his own)