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 companies are also expected to face greater operational and funding challenges which could have bearing on their performance, particularly for small to mid-sized brokerage companies."
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 companies, 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 companies 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.
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