You might have come across the term Buy Now, Pay Later (BNPL) when buying an expensive product online. What started as a retail-focused financing tool has now extended to stock market investments, with securities firms offering BNPL-style margin trading to retail investors. “The size of the overall BNPL market in India is estimated to reach US$22 billion by the end of 2025. It has enjoyed a steady growth of over 20% CAGR over the last four years—thanks to easy credit,” says Jayatu Sen Chaudhury, Professor of Financial Analytics at the Great Lakes Institute of Management, Gurgaon.

While this innovation provides greater access to financial markets, it also raises concerns about the formation of a new kind of stock market bubble in India.

The emergence of BNPL

BNPL for stock purchases essentially functions as a form of leveraged investing, allowing individuals to buy stocks with borrowed money without immediate repayment. This may alter the risk profile of retail investors in several ways, often exposing them to risks they may not fully understand.

For instance, suppose you are interested in purchasing stocks valued at ₹50,000 but only have ₹20,000 available in your account. Using the BNPL option, you can proceed with the purchase. In this scenario, your ₹20,000 acts as the initial margin, and the brokerage firm provides the remaining ₹30,000 as margin trade funding. BNPL is also referred to as Margin Trade Funding (MTF).

Companies such as 5paisa Capital, Upstox, and ICICI Direct have introduced BNPL-like margin funding products, providing traders access to stocks without requiring full upfront payments. These platforms allow investors to leverage their positions using borrowed funds, paying for the stocks over time rather than all at once. The appeal is clear: small investors with limited capital can participate in stock trading at a scale previously reserved for large or institutional investors.

A lesson from the past: The dotcom and 2008 crashes

The phenomenon of credit-fuelled market bubbles is not new. The Dotcom Bubble (2000) and the 2008 Global Financial Crisis both featured excessive leverage and speculative investing. In India, the Harshad Mehta scam (1992) and the Ketan Parekh scam (2001) were prime examples of how easy credit and speculative trading can lead to financial disasters.

In both historical cases, investors used borrowed funds to invest in overpriced assets, believing that markets would only move upwards. When reality set in and corrections occurred, those who had taken on excessive leverage suffered massive losses, triggering broader market collapses.

Pankaj Singh, Smallcase Manager and Founder at SmartWealth Ai, said, “The Chinese Stock Market Crash in 2015 was fuelled by margin financing, which inflated stock prices. A sudden correction led to forced liquidations, exacerbating the downturn.”

In the present market conditions, BNPL might prove to be a double-edged sword. If you incur losses, you still have to pay interest on those losses. Siddharth Alok, AVP Investments at Epsilon Money, says, “Behavioural finance studies indicate that easy credit often leads to overtrading and speculative bubbles. The most recent Cryptocurrency Leverage Boom in 2021 saw massive losses when markets crashed.”

Alok explains, “Suppose you take a loan for your business. If the business fails, not only have you incurred losses, but you also need to repay your creditors. The same happens with market downturns. Because you are leveraged, it increases your losses multifold.”

Let’s break it down further:

• Price rises: You have ₹10,000 and want to buy a stock priced at ₹1,000 per share. Normally, you can buy 10 shares. But with margin trading, you borrow ₹30,000 and buy 40 shares. If the stock rises to ₹1,250 in 60 days, you sell for ₹50,000 (₹1,250 × 40 shares). After repaying ₹30,000 plus ₹700 in interest (annualised 14%), you make a profit of ₹9,300—a 93% return on your initial capital of ₹10,000.

• Price falls: If the stock falls to ₹750, your shares are now worth ₹30,000, which is exactly what you borrowed. After adding interest, you owe more than you have, leaving you with a ₹10,700 loss—wiping out your ₹10,000 and putting you in debt.

Furthermore, as prices fall, brokers might force-sell your shares to recover their money, pushing prices even lower and creating a domino effect. Margin trading can supercharge gains, but it can also wipe you out completely. It’s like riding a fast bike—thrilling but risky if you lose control.

Gaurav Arora, Fund Manager at Equirus, said, “In sharp market downturns, many participants might face margin calls. If a large number of participants fail to pay up, institutions might be forced to sell positions, leading to a vicious loop until positions are closed.”

Discourage leveraged trading

Generally, regulations help prevent investors from losing more than they have. However, unchecked leveraged trading can lead to losses far exceeding an investor’s available capital. “For instance, with 4x leverage via MTF, an investor with only ₹100 cash could lose up to ₹400 in assets. Therefore, the aggressive promotion of leveraged trading should be discouraged,” said Singh.

Vishwanathan Iyer, Senior Associate Professor and Director of Accreditation, Finance and Accounting at the Great Lakes Institute of Management, Chennai, said, “BNPL can affect credit ratings based on repayment behaviour. MTF/BNPL does not directly impact credit ratings, but if an investor defaults, it can negatively affect overall creditworthiness.”

Regulatory changes and requirements

In 2017, SEBI revamped MTF rules to improve transparency and reduce risk. Brokers are required to borrow only from RBI-regulated financial institutions instead of NBFCs. SEBI also requires brokers to link borrowing limits to their net worth and keep collateral stocks separate from funded stocks. Additionally, this facility is limited to specific liquid stocks, with stricter disclosure norms for better transparency.

Manish Goel, Founder and MD of Equentis Wealth Advisory Services, said, “SEBI has taken steps to reduce the risks of leveraged services like BNPL for stocks. However, many small investors may not fully understand the risks and might invest due to the promise of high returns, often influenced by flashy marketing.”

Striking a balance

The primary risk lies with young, inexperienced investors, who may find unsolicited access to MTF/BNPL more addictive than beneficial. BNPL providers may use aggressive marketing, making it seem like a quick way to make money while hiding the real costs.

Thus, financial institutions should disclose all potential risks clearly and ensure their rates are not predatory. They should also focus on investor education, particularly among younger investors who have yet to experience a full market cycle. SEBI should also crack down on misleading ads that make BNPL look risk-free.

The road ahead

The Indian stock market is at a crossroads. While BNPL has the potential to bring millions of new investors into the fold, it also carries the risk of market instability. Without adequate regulatory oversight, the combination of easy credit and speculative trading could lead to a new kind of financial bubble.

Whether the stock markets experience a boom or a bust will depend on how swiftly and effectively regulators, investors, and financial institutions address these emerging risks. The lessons from past financial crises remain clear: easy money can fuel market surges, but it can just as easily trigger catastrophic crashes. Will BNPL stock trading be the gateway to wealth creation or a market meltdown? Only time will tell.