Corporate fixed deposits offer higher rates than banks. But is it safe and smart to go for them?

There are a few precautions you must take before you are tempted to put your money in corporate fixed deposits

Interest rates offered by banks on their fixed deposits are on the rise. Today banks are offering 8.25% on deposits of more than a year and 9% for deposits of more than two years. These are attractive, but there are even more attractive deposit options from companies looking to raise funds. These include non-banking financial companies (NBFCs) that are raising money from savers at attractive rates.

The rate of interest is determined by the tenure of the deposit as well as some other factors. The deposits are governed by section 58A of the Companies Act. The table below offers some corporate FDs which are currently on offer. The interest rates offered by some companies are substantially higher than that offered by banks.



Is it worth putting money in these FDs to get a couple of percentage points of extra interest? Like bank FDs, they are a good source of monthly, quarterly, half-yearly, or yearly interest income. The tenure is flexible, ranging from six months to seven years. The other benefits are that no tax is deducted at source in case the interest is only up to Rs5,000 in a year. They have a nomination facility and the operational process is simple too-even PAN is not required.
However, higher the interest rate, the more the risk that is associated with it.

Thus, a company offering 15% interest rate would be riskier than that offering 11%. These deposits are not secured, unlike in banks where deposits up to Rs1 lakh are covered by a deposit insurance. Besides, deposits with public sector banks are totally safe. It is inconceivable now that the government will let the depositors of any public sector bank down. But in the case of default by a company, the investor is likely to lose the money. Besides, the investor has no claim over the assets of the company in case the company is to be wound up. That makes corporate FDs risky and, therefore, they attract a higher interest.

In order to protect ones investment from risk, the performance of the company must be reviewed before investing. Also at the time of maturity, if you wish to reinvest your amount, check the company's performance. Keep a regular check on the companies in which you plan to invest by keeping a track of its balance sheet and share prices. This will enable you to decide your investment in corporate fixed deposits. Before investing, ensure that you choose companies that have a good credit rating (A or above).

Here are some guidelines on company fixed deposits that you should avoid.
Companies which offer interest rates that are more than 3% higher than those offered on bank FDs.
Companies that are not paying dividends to the shareholder.
Companies whose balance sheet show losses.
Companies which are below investment grade (A or under) rating.
Unlisted companies, as it is very difficult to judge their performance.
If you wish to get higher returns, you must take a little risk. And if you wish to avoid the risk, you must compromise on the returns. However, when deciding on your option for corporate FDs, it is important to know how to choose the proper fixed deposit and how to ignore the wrong ones. Here are a few tips to ensure higher returns with low risk.

Spread your risk by spreading your investment in fixed deposits over a number of companies in different businesses. Do not put more than 10% of your investment in one company. This has two benefits. First, your risk will be diversified among various industries. Second, the interest from one company may not exceed Rs5,000, and hence there will be no tax deducted at source (TDS).

Choose the right tenure of deposit. Ideally you must invest for a period of one year. Blocking your investment for more than one year could be risky, because the performance of the company cannot be assured over a long period of time.

Make a periodic review of the company from time to time and at the maturity of the deposit. This will help you to decide whether you should renew or reshuffle the deposit. In the case of company fixed deposits, it is necessary to check whether they have been rated by agencies like Crisil, Icra, etc. Also check the number of years that the company has been in business, the profitability of the company, the and the reputation of the promoters.  If you know of people who have invested in company fixed deposits, try to find out if these companies have been prompt  in sending maturity proceeds, interest cheques, and how responsive they are to queries.

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COMMENTS

Ramesh B

8 years ago

True, Co FDRs are unsecured and higher the rate, higher the risk.Many FDs are not rated.Is it not mandatory to get it rated? Anyway, some Co FDR are AAA rated by reputed Agency.One such FD is in the list of article.very reputed group since decades.One pharma Co;offers 12% int.having price of 300+ of 10.But the form doesnot give contact no./email;/website of the co. very strange!FD holders have burnt fingers in many co; like Soundcraft,Morepen lab. etc...

anil lathia

8 years ago

good article

SHRIDHARA RAO T V

8 years ago

It Is True Higher Yield higher Risk

narendra ahuja

8 years ago

Youa re right that one can losse total money . But sometimes one does fall in the prey. It is better to avoid such companies which pay more than 3 percent than banks fixed epsolt rates

n ahuja
9312234825

arun adalja

8 years ago

no doubt corporate fds are risky but companies like tata and birlas risk is very low and one can trust them at least for 1 year tenure i will be obliged if somebody gives the list of default companies which are not refunding money after maturity?i can give some llyods finance,roofit industries,sun earth ceramics,snowcem and morphane lab.comments are welcome.

REPLY

vikas gupta

In Reply to arun adalja 8 years ago

Unitech Ltd. is delaying the maturity proceeds

Muthu

8 years ago

I hear from the market about advisors moving investor money from equity into corporate FDs which offer around 3% commission. Infact even within mutual fund schemes, people are being advised to move from equity to FMPs.

When investors question about non performance of equity for the last 3 years (they would have done well through SIP route but not so well for lump sum), it is advisors responsibility to explain about the nature of this investment and explain the virtue of sitting tight.

Even if this means, loosing clients it is fine. If we are genuine, hopefully they would understand the value of our intent and advice and come back to us at some point of time.

I advice what I feel right. At worst, there may be error in my judgment but would not play to clients’ greed and fear. I strongly discouraged lump sum investments in the peak of last bull market, when people wanted to pour in money.

In my opinion, in addition to continuing SIPs, the valuations in the markets now are reasonable to consider lump sum investments, subject to one’s asset allocation.

If the market runs up during next 2 years, what answer these advisors would give for moving away and locking equity money in FMPs or corporate deposits?

I know advisors and wealth management firms who moved clients’ equity money into FDs & FMPs in the later part of 2008, completely missing out the rise in markets of 2009.

One person came to me with Rs.1.8 crore worth mutual fund portfolio. His initial investment in 2006 was Rs.3 crore and the money was managed by a reputed private bank. They have invested his money in the name of more than 6 members of the family, into dozens of schemes, mostly NFOs, totaling more than 90 folios. They have moved most of his money (other than some closed ended equity schemes) into liquid schemes in the end of 2008.

He wanted my help for redemptions and swore that he would never invest again in mutual funds. He was in no mood to listen about the right approach to investing, asset allocation etc. So I helped him in redeeming the funds, ofcourse by charging a fee. I don’t know how many like him would have made a loss of 40% even in bull market, due to inappropriate advice.

CA Karan Batra

8 years ago

I believe Bank Deposits are better than Corporate Deposits as they can be withdrawn and cancelled prematurely but very few corporate deposits offer this advantage as most of them are for a fixed period with no option of redeeming before the expiry of the term

krishnan s

8 years ago

corporate deposits are very unsafe and never to trust even the reputed companies . these deposits are treated as unsecured hence it is best to avoid them
Bank deposits are the safest bet because the govt will never allow banks to go bust. mMoreover deposits are covered upto 1 lakh by the deposit insurance .

Sundaram

8 years ago

Is it true that there is a restriction imposed by the authorities that the maximum interest rate offered by Corporates cannot exceed 12.5% p.a.?

CGVenkatassubramanian

8 years ago

How can compare appels and oranges.bank karur offers 10% for 12 months forall age groups.compareing with housing companies SORRY keep away from all the realesate company

AMARISH SHAH

8 years ago

sir,
the inflation rate is going high and naturally investor like to invest in higher interest rate cos.
as you told that the risk should be minimise.
even there is one site if anybody has complain for non reciept of payment,they should approach -www.investorhelpline.in

RBI report on customer services expected to be ‘pro-consumer’

Complaints by customers on various banking matters have been dealt with in the Damodaran Committee report giving more power to account holders

A series of complaints related to banking services have exposed instances where banks are openly floutingly rules and regulations of the Reserve Bank of India (RBI). Now, in the interest of customers, these issues have been addressed in a report on customer services prepared by a committee headed by former Securities and Exchange Board of India chief M Damodaran. Strangely, however, the report has not been released, nearly 12 months since the committee was set up in June last year.

According to sources, "the report on customer services by the RBI has described solutions to resolve customer issues. The report is believed to be pro-consumers."

"But the report, despite being ready, has not been released for the reasons best known to Mr Damodaran. Even the committee members are unaware of the release date," the source said.

There are a lot of complaints by customers relating to poor banking services, and very little has been done to resolve these issues, leaving many customers dissatisfied. Of course, there have been few cases when some people have fought and got their issues resolved.

Like the case of Pune-based resident Anil Agashe, who was asked by HDFC to close his existing joint account and open a new bank account after the demise of his father, who was co-joint account holder.

Following the demise of his father, Mr Agashe approached the bank to delete his father's name and continue the account in his own name. However, the bank informed Mr Agashe that "as per the rules of the bank" the account would be closed on the death of the first account holder and a new account would have to be opened in his name. This is surprising, as the RBI allows the simple deletion of the name of the deceased person and continuation of the account.

Being an ex-banker, Mr Agashe was aware of the RBI guidelines and got HDFC to follow the rules. (Read, 'Banks flout RBI rules on retaining account numbers after the demise of a joint account holder'.) Sources have confirmed to Moneylife that the RBI will take up this issue with HDFC Bank.

Another example is that of Pune-based senior citizen and entrepreneur Sharad Phadke, who used the Right to Information Act (RTI) to force Bank of India to pay for failed ATM transactions. On 18 October 2009, his ATM transaction of Rs1,000 failed. He tried a second time and received the cash. However, the failed transaction was also debited from his account in Bank of India. The same day he lodged a complaint online to Bank of India. But nothing happened until 1st December, a good 40 days after the failed transaction occurred.

According to RBI guidelines under the Payment and Settlement Systems Act 2007, it is mandatory for banks to restore the failed transaction amount of the customer within 12 days, or pay a penalty of Rs100 per day to the customer.

Mr Phadke produced a copy of the RBI circular to the bank's officials and Rs1,000 was credited to his account. He subsequently evoked the Right to Information (RTI) Act to find out the extent of the problem and the number of other cases of failed ATM transactions. In the end the bank compensated him with Rs6,500 for the 65 days delay in resolving his case.

Mr Phadke also routed a query to the RBI through RTI, seeking to know whether it had conducted an audit of the banks to check if they were complying with the guidelines on failed ATM transactions.

In its reply the apex bank admitted that "no audit is conducted by RBI so far as per Section 16 of the PSS Act, 2007."

Speaking to Moneylife, Mr Phadke said, "Such a reply is vague as it is the duty of the RBI to check if banks are following the rules and regulations. It is the customer who suffers in the end, as banks get away easily. Where would a lay man go to complain if the RBI itself doesn't seem to be aware of the activities of the banks?"

Moneylife has repeatedly written about the report on customer services and that its release has been delayed for unexplained reasons. (Read, 'The curious case of the Damodaran Committee's report on customer services: Why is it still in limbo?')

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COMMENTS

pradip das

8 years ago

I wants to know drop box is safe, according to rbi guidline bank bound to received cheques in the counter but they denied. what I will do

Deregulating SB interest rates without strengthening the banking industry is putting the cart before the horse

The RBI must consider long-pending measures to strengthen the banking system and introduce customer service initiatives that would enable customers to take advantage of the liberalisation in interest rates

As a prelude to deregulating the savings bank interest rate, the Reserve Bank of India (RBI) recently released a discussion paper describing the pros and cons of deregulation and invited feedback from the public on the issue. The deregulation of interest rates on savings bank (SB) accounts without strengthening the banking industry is virtually putting the cart before the horse. In order to assist the banks to smoothly move over to the deregulated regime, the RBI should first take steps to strengthen the banking industry that are long overdue.

The RBI in its discussion paper raised two concerns on deregulation of SB interest rates. First, the possibility of an asset-liability mismatch that could be caused; and second, net interest margins (NIMs) could be affected. It is to meet these two concerns that this article suggests some far-reaching changes in the way banks are regulated and what the RBI can do to strengthen the banking industry, before giving complete autonomy to banks in fixing interest rates on SB and current deposits and certain types of advances.

1. Insurance cover: First and foremost, it is necessary for the RBI to enhance the deposit insurance cover which has been at Rs1 lakh per customer since 1 May 1993. Across the Western world, there has been a  steep increase in the deposit insurance cover following the recent financial turmoil. The US Federal Reserve recently raised the insurance cover to $250,000 from $100,000 to maintain stability and public confidence.

In the Indian context, though there have been no bank failures, it is necessary to increase the insurance cover in line with inflation over the last two decades, with a view to creating confidence among the public, who would be disillusioned, once banks begin to quote higher SB interest rates. The present deposit insurance cover should be raised to a level of at least Rs10 lakh, which will not only inspire confidence, but serve the cause of financial inclusion as well.

2. Restore interest on CRR balance: The RBI had in its discussion paper raised concern that deregulation may adversely affect the net interest margin of banks. Banks that are already reeling under the burden of higher operational costs due to increase in the wage structure and pension options, and shrinking margins due to the demand to reduce the spread between the deposit and lending rates, will find it difficult to maintain their profitability if SB interest rates are also deregulated. Without any other source of income to compensate the hike in SB interest rates this is bound to happen on deregulation.

It is here that the RBI should reconsider its earlier decision to completely stop paying interest on CRR balances maintained by banks with the central bank. Till a few years ago, the RBI was paying interest on CRR balances beyond 3%, which was unilaterally and illogically withdrawn and this has affected the profitability of banks considerably. The RBI should restore payment of interest at the appropriate rate, at least on the major part of CRR balances, which will greatly help banks to maintain their profitability.

Alternatively, the RBI should consider reducing CRR to the level of 3%, thereby providing leeway to banks to earn on these funds which are blocked for no fault of theirs. If the RBI wants to monitor money supply to control inflation, it has many other avenues to do so, like open market operations and the SLR route, which would not hurt the banks like the high CRR without interest has.

3. Level playing field: At present, there is no level playing field for public sector and private sector banks. While interest subvention is provided to public sector banks, no such benefit is available to private banks. There is need to permit all private and foreign banks to handle government business, like collecting taxes, placement of government deposits, etc, which will not only be of help to the banks concerned but also to their customers.

4. Expand role of NABARD: The age-old directive on priority-sector lending requires complete overhauling and the whole concept must be reviewed and changed drastically. Lending to the priority sector should be made voluntary and encouraged by incentivising such lending, rather than penalising banks that do not reach the stipulated targets. Incentives like lower CRR and SLR requirements, providing additional funding at a concessional rate from the RBI to the extent of lending to the priority sector, may be considered to encourage banks to continue to lend to these sectors.

Instead of forcefully pushing commercial banks to lend to sectors where they are not comfortable, the RBI should expand the role of NABARD substantially, to lend directly to these preferred sectors by branching out in all the districts of the country in a time bound manner. To hasten this process, regional rural banks can be either merged with NABARD or made subsidiaries, through which direct lending can be made under the authority and control of NABARD.  This will considerably lessen the burden on commercial banks, who have to show continued performance to remain in business and raise capital from the market.

5. Asset-liability mismatch: Another area of concern raised by the RBI is the mismatch in liquidity that could be caused by the deregulation of SB interest rates. This requires serious consideration on the part of the RBI, as SB deposits when deregulated may lose the character of a 'core deposit' and would be similar to current deposits, which can move swiftly to where it is invited with higher benefits. To minimise its impact on the liquidity of banks, it is necessary to put in place adequate safeguards, like putting a ceiling on long-terms loans granted by commercial banks, encouraging 'take out financing' by providing certain incentives, and allowing banks to raise long-term funds by giving tax concessions and other incentives.

Apart from strengthening the banks, the RBI should also put in place some customer service initiatives.

1. KYC (know your customer) norms
have become a deterrent for financial inclusion, with each branch asking for different documents every time an account is opened. Again, when a customer moves from one bank to another, he has to satisfy the other bank by complying with KYC norms all over again.

To obviate this difficulty, it is advisable to evolve a system similar to the one followed by mutual funds in the country. They have set up a centralised agency, where the record of compliance of KYC norms is maintained and this record is shared by all mutual funds. Thus new customers to a fund do not require to go through the entire KYC process again if they have already complied with the norms when investing with any other mutual fund. CDSL Ventures Ltd, which is the centralised agency for mutual funds in this respect could be used by banks as well, as this would hasten the process of putting in place a reliable and tested mechanism for the banking industry. This would be a boon for customers wanting to move from one bank to another to take the benefit of higher interest rates offered in a competitive environment.

2. Account number portability:
Banks should consider providing account number portability (ANP) for customers, on the lines of mobile number portability (MNP). This will help customers move from one bank to another smoothly and without having to change their account numbers, thereby making life easier for them. Care will have to be taken to ensure that portability provides flexibility of transfer of funds under ECS and so on, without any mishaps, as account portability is more onerous than simple MNP. It will require careful planning and cautious implementation, with due regard to the nature of the work involved.

3. Synchronise customer ID with UID: With the introduction of unique identification numbers (UID), it would be necessary to synchronise customer IDs allotted by banks with UID numbers, so as to better serve the interests of customers in the long run. The project must work in tandem with the account number portability proposal, as they serve identical objectives so far as customers are concerned.

4. Dematerialilse deposit receipts: Many banks in India still issue deposit receipts on security paper, spending considerable amount of money in this process. They could save this wasteful expenditure through dematerialisation of deposit receipts, while issuing only paper receipts like airline tickets, which are now the accepted norm. Unless the RBI advises banks to move over to the easier method of paper receipts, many banks would shy away from this innovation. It is up to the RBI to consider making it mandatory for all banks to follow a uniform system of deposit receipts in ordinary paper form instead of security paper. This would not only be customer friendly, but also a positive step in the direction of conservation of the environment.

(The author is a banking and financial consultant. He writes for Moneylife under the pen name 'Gurpur'.)

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COMMENTS

Vivek Agrawal

8 years ago

I think savings account interest should be linked to inflation. For eg. last year inflation was wopping 14% so according to me savings intersest should be the same.

prash n

8 years ago

An article with unique opinion. Lots of thoughts seems to have gone to the article.

On the 'deregulation of sb interest rates', this will be a reality, and hence all the participants in this circle i.e bankers, customers, etc be prepared

Nagesh KiniFCA

8 years ago

nagesh replies to prakash mehra -
THERE IS A CLEAR DISTINCTION BETWEEN RAISING ISSUES OF PUBLIC INTEREST AND CONCERN AND LOBBYING. THEY ARE AS DIFFERENT AS CHALK AND CHEESE.
SAMAAJNE WALE sAMAAJ RAHE HAI, NA SAMAAJE WOH ANDI HAI!

Dr Vaibhav Dhoka

8 years ago

Freeing interest rate for banking industry is not an answer in this 1 billion plus country.Ours is a country which has mixed strata of account holders.We are not fully literate in e-banking.Our banks in this decontrol system will definitely go hey-ware.At present most of the banks are silently revising service charges in core banking without making customer aware by proper notice are making killing by levying hefty charges.Once decontrol takes place they will further cheat customers by silently levying and increasing service charges.And ours is a country which is flooded by lame and tame regulators who take care of their masters and leave gullible public to these SHARKS.RBI takes care of BANKERS,SEBI takes care of BROKERS IRDA takes care of INSURERS.The common MAN is made POORER by these institutions. So before decontrol service by these should be audited ,improvements in customer service be taken on priority and grievance settlement should be quick and easily approachable to a COMMON MAN.Then they should think of DECONTROL>

Prakash Mehta

8 years ago

It is unfortunate that moneylife has chosen to be part of Banking Industry Lobbysts pannel.

Liberalisation pf SB interest is must and it is urgent need of Indian Consumer.

REPLY

Ashok

In Reply to Prakash Mehta 8 years ago

in what way?

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