With increasing retail investor activity and a surge in trading volumes, the domestic brokerage industry's aggregate revenues are expected to reach Rs 23,000 crore in the current financial year, marking a year-on-year growth of 10 to 12 per cent.
According to investment information firm ICRA, the domestic capital markets have witnessed an unexpected surge lately in stark contrast to the overall economic outlook.
And while broking yields continue to be under pressure, given the competitive dynamics as well as product mix (increase in non-delivery volumes as well as the rising share of index options), the healthy growth in turnover more than offset the impact on broking income.
As per ICRA, the aggregate brokerage industry income stood at Rs 21,000 crore in FY20, registering a growth of 8 per cent over Rs 19,500 crore in FY19.
"The outlook for the brokerage industry is cautiously stable. While the industry is expected to clock a healthy growth at an aggregate basis, brokerage compes are also expected to face greater operational and funding challenges which could have bearing on their performance, particularly for small to mid-sized brokerage compes."
The industry profitability level is expected to be supported by growing retail share coupled with an increase in interest income through margin funding, provided the credit cost remains under check and distribution of financial products, despite the pricing pressure and contracting yields.
Brokerage compes, however, are expected to grapple with increasing operational challenges in the current environment which will require a greater focus and spend on technology to ensure uninterrupted operations as well to meet regulatory compliance requirements (given the enhanced monitoring and reporting requirement).
Entities with established information technology infrastructure as well as commensurate processes and controls are expected to fare better. The recent guidelines regarding the raising of funds as well as the use of client securities by broker entities are expected to increase the funding requirement for brokers to maintain adequate margins at exchanges.
This coupled with the standardisation of cash segment margin is expected to limit the brokers' ability to offer additional value proposition like flexible payment terms, credit to its clients. Brokerage compes having their own assets (hard assets or securities) and strong balance-sheets will be at an advantage while trying to raise debt funding.
Over the long term, a stronger regulatory framework is expected to strengthen industry structure and improve financial discipline which is critical, given the fiduciary duty of broking entities.
Given the recent violations in the use of client securities coming to light in the recent past, stricter terms for brokerage houses will also help strengthen investor confidence and thus augur well for the industry.
( With inputs from ANI )
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