MORE SKIN IN THE GAME

Don’t be lured just by the high rates, NBFC and company deposits carry risks

The year 2018 saw interest rates go upwards as the Reserve Bank of India (RBI) raised the repo rate twice by 25 basis points each (100 basis points is equal to one per cent). This led to banks raising their fixed deposit as well as lending rates. Prime lender State Bank of India (SBI) is currently offering an interest rate of 6.8 to 6.85 per cent on one to 10 year deposits. For people in the top tax bracket, post-tax returns will come down to 4.76 per cent and 4.8 per cent respectively.

However, some nonbanking finance companies (NBFCs) have been offering a higher interest rate of up to 9 per cent or above since October-November. Liquidity conditions tightened for NBFCs after the IL&FS crisis forced them to raise the interest on retail deposits. “The recent liquidity challenges has led to some risk aversion vis-a-vis the NBFC sector. Capital market funding, especially from mutual funds, are typically at the shorter end of the curve. Hence, to diversify sources of borrowing, it could be that deposits are being offered high rates,” says Lakshmi Iyer, chief investment officer (debt) and head, products, Kotak Mahindra Asset Management Company.

Shriram Transport Finance is offering an interest rate of 9.25 per cent on five-year deposits under a yearly payout option. Bajaj Finance is offering 8.75 per cent for three- to five-year deposits. DHFL is offering 9 per cent on three- to 10-year deposits. Post-tax returns on these will come to around 6.3 per cent for a nine per cent deposit. Such returns do look attractive when compared to bank fixed deposits.

ARE COMPANY DEPOSITS IDEAL?

Company deposits typically offer higher interest rates compared to bank fixed deposits. It helps investors lock money for a higher interest rate for a longer term and with monthly, half-yearly and annual interest payout options, it suits investors looking for a regular income.

However, no matter how attractive company fixed deposits look, one should understand that they are riskier than bank deposits. In case of bank fixed deposits, deposits of up to Rs 1 lakh is secured and the chances of banks defaulting are very low while company deposits do carry that risk. Company deposits are generally unsecured loans and investors have limited legal recourse in case of default.

So, corporate deposits are not a bad option but due diligence is a must. “Interest rates are not the only factor for making decisions. Some research and due diligence are prudent for a safe investment,” says Abhinav Angirish, founder, Investonline.in.

“Factors such as management, annual accounts, rating and past track record of the company should be looked at before investing,” advises Vikram Dalal, MD, Synergy Capital. “Only if you have the ability or resources to analyse company financials is it worthwhile to invest in company deposits.”

“The retail investor should go for company deposits only if he or she has undertaken a thorough research of the company’s financial health. Keep in mind on thing, its return of capital and not just return on capital that is critical,” says Lakshmi. It is also be a wise idea not to put all your money in one company deposit, diversification is a better mantra.