Zerodha's Nithin Kamath warns against 'buy now pay later' route for retail investors. Here's why

Terming it as probably the "worst financial product for retail investors," online broking firm Zerodha's co-founder Nithin Kamath on Monday explained why the "buy now pay later" or BNPL lending business may not be the right method to invest in Indian bourses.

In a series of tweets, Kamath posted, "Unlike the previous bull runs, there isn't a lot of leverage in the system this time. Stocks are mostly bought with full money upfront. So when there are drawdowns in the market on days like today, retail investors aren't forced to liquidate, which also increases volatility."

Kamath's comments come on the day equity benchmark Sensex plummeted 1,170 points on Monday, dragged by losses in Reliance Industries, Bajaj Finance and Kotak Bank. The 30-share BSE index ended 1,170.12 points or 1.96 per cent lower at 58,465.89.

Similarly, the NSE Nifty fell 348.25 points or 1.96 per cent to 17,416.55.
"Credit goes to SEBI & also all of us new-age online brokers who haven't pushed customers to borrow and buy while placing orders. If platforms enabled greed by nudging users to borrow to buy more quantities, customers would ignore the risks of margin funding (MTF)," he added.

However, warning about the BNPL method in retail investing, he added, "Given the high customer acquisition costs for many brokers, what worries me is if someone launches a buy now pay later type of product for investing, it will end up pushing everyone else to start," adding that such a method to generate revenue will not be right for the customers.

Kamath also explained that buying stocks by borrowing at approximately 15% and risk of being liquidated in drawdowns, is "probably the worst financial product for retail investors," and hoped that the broking industry like others doesn't morph into a lending business to recover the very high cost of acquiring a customer.

Zerodha's co-founders Nithin Kamath and Nikhil Kamath are the richest self-made billionaires in India under 40, according to IIFL Wealth and Hurun India’s 40 and Under Self-Made Rich List 2020. Nithin and Nikhil Kamath are the wealthiest entrepreneurs under the age of 40 in India with a wealth of around Rs 24,000 crore.