When wealthtech unicorn and discount stockbroker Groww launched a lending business in December, it had the industry puzzled. Why would the six-year-old company, which has been growing its stockbroking market share by leaps and bounds leaps and bounds Gadgets 360 How Investing App Groww Witnessed Over 200 Percent Growth in First-Time Investors in COVID-Hit 2020 Read more , want to enter a seemingly uncharted area?

While its Groww Credit Line product offers unsecured loans to customers, The Ken has learnt that the company has also been facilitating margin trading margin trading Groww margin trading Read more  of stocks, kind of like an invest-now-pay-later product, akin to Buy-Now-Pay-Later ( BNPL BNPL The Ken Simpl, LazyPay, and the future of Buy Now Pay Later in India Read more ). Known as ‘margin funding’ in industry parlance, the product lets clients buy and hold stocks by putting up just a small portion of the total value, and borrowing the rest from the broker. The broker earns interest on the amount lent, while the buyer hopes to gain from selling the stocks later at a high price that covers the interest cost and more. 

On paper, it’s a win-win proposition. It’s an easy and attractive way for retail investors—especially the young investor cohort that Groww mostly has—to increase their exposure to the stock market. And it brings in interest income for Groww. 

But speak to those in the industry, and pat comes the reply. “Groww’s BNPL kind of offering for investments is a horrible product,” says a senior executive from the broking industry. “When you are investing in the market, the worst thing to do is to borrow to buy.”

The stock market is a volatile beast and BNPL users could end up losing money and/or their holdings. This will hurt customers who could turn inactive. And that will hurt Groww too, says the senior executive. “In the business of money, you make money when your client makes money,” they say. The senior executive and others in the industry The Ken spoke to requested anonymity as they didn’t want to be seen publicly commenting on the company.   

Margin funding has traditionally been a product for high-net-worth investors. Selling this to retail investors is problematic.

— Senior broking industry executive

The simple, and simplistic, answer to why Groww is doing it is—because it can. 

AUTHOR

Anand Kalyanaraman

A certified Chartered Accountant, Anand chose to pack the power of numbers with words when he left a career of seven years in accounting, putting together MIS reports, and investment research to enter journalism. Before joining The Ken, Anand was Deputy Editor at The Hindu BusinessLine, a newspaper he worked at for 11 years.

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