POSTED BY ON May 28, 2018 COMMENTS (15)

• Fixed Deposit India
• Corporate Fixed Deposits In India
• Corporate Interest Rates Today
• Corporate Fd Rates In India

Do you think corporate fixed deposits are as safe as bank Fixed Deposits? Has come agent convinced you that you will get 2-3% higher returns from corporate fixed deposits without any risk?

If that’s the case, you need to be educated a little more about corporate fixed deposits. I will talk about 5 major things every investor should know before they put their hard-earned money in corporate fixed deposits.

What are Corporate Fixed Deposits?

Safety of corporate fixed deposits are certified by the rating given by rating agency. The rating agency determines the ability of the company to pay interest as well as principal to the investors. $prxqw 5v 5dwh ri,qwhuhvw s d $prxqw 5v 5dwh ri,qwhuhvw s d $prxqw 5v 5dwh ri,qwhuhvw s d $prxqw 5v 5dwh ri,qwhuhvw s d.

Corporate Fixed Deposits are deposits that are issued by private and public companies, which work very much like bank fixed deposits. There is an interest rate offered and there is a maturity duration for the company deposit. You can either opt for a cumulative option (where your interest is added in deposits) or you can opt for a non-cumulative option, where you are paid the interest after every fixed duration.

A lot of agents get a good commission for selling these corporate fixed deposits to their clients. Nothing bad in that as such, but you need to be clear about some important and critical points related to company fixed deposits.

Let’s start…

Higher the return, higher the chances of Default

In almost all cases, the corporate fixed deposits offer quite higher returns compared to a bank deposit. If bank deposits rates are 7 %, you will see that company deposits floating in markets are providing your returns in the range of 8-14%.

Always ask the basic question – “Why is a company providing higher returns?”

The logic is very simple, a company needs money for expansion or for some project and to fund that project, they can either take a loan from a bank or raise money from other measures and for that they will have to pay very high interest.

So they float corporate fixed deposits where normal investors like you and me can invest in their deposits and earn higher returns.

Fixed Deposit India

But, because you get higher returns, there is also high risk involved in corporate deposits. You never know how the company will do in the next few months or years. You never know how the project of a company turns out and if it’s going to make a profit or loss.

In short, after a few years, when its time for maturity – what will happen if the company’s financial health is not good? Will they repay the money on time? Will they repay the money at all?

In one of the recent examples, a lot of investors had put their money in DSK group fixed deposits

A lot of senior citizens are lured into parking their hard-earned money into many shady fixed deposits offered by small or medium-sized company fixed deposits by showing them high returns.

Below is a heart breaking case study of a 78 yr old person who had put all his gratuity and PF money into DSK Kulkarni FD (a very big real estate group in Maharashtra). When his FD maturity came, he was told that he should renew it for another 6 months as its tough to repay right now. The video below is in Marathi, but you will understand some words and will be able to make out what is being said!

So please understand that when you are investing in corporate fixed deposits, there are good chances that if it’s offering very high returns, there is a lot of risks involved in that. You cant get higher return just like that.

Many big companies also offer corporate fixed deposits, but then the interest offered is quite lower and looks reasonable. However the risk is still there unlike a bank FD.

Every company fixed deposits are rated by agencies like ICRA, Crisil, CARE etc and they give a rating to the FD. These ratings are a measure of the company’s ability to pay the interest as well as principal to its investors. A high rating means no or very low probability of default.

Corporate FD’s are not regulated by banking rules

Note that unlike bank fixed deposits, corporate fixed deposits are not regulated directly by RBI regulations. All the deposits under corporate deposits are governed by provisions of 73 to 76A of the Companies Act 2013 (erstwhile section 58-A of The Companies Act 1956).

If the company is not paying you on time, you cant do much in that other than following up with the company. However, Fixed Deposits of Corporates are secured borrowing, so in case of winding up of business, secured borrowings are given preference over equity shareholders in terms of repayment.

Some important points related to Corporate Fixed Deposits

• TDS is deducted @10% if the yearly interest is more than Rs 5,000
• Premature closure of company FD is not possible for 3-6 months
• Pre-closure of company FD is not a straight forward process, it’s cumbersome and involves too many documents

Still, want to invest in Corporate Fixed Deposit?

If you still want to go ahead and invest in a company fixed deposits, please take care of the following points.

• Make sure that the company is paying regular dividends to its share holders
• The balance sheet of companies is showing profits at least for 3 yrs in a row
• Make sure its an at least a 5 yr of company
• Make sure they are offering realistic returns (2-3% more than a bank FD). Do not fall for those companies which are offering very very high returns
• Make sure these companies are listed on the stock exchange
• Make sure that they have got a high rating from CRISIL like (AAA or AA or A at least)

Let us know if you liked the article?

In India, Fixed Deposits have always been the favourite type of investment. From saving for a trip to saving for retirement, they have been the all-purpose solution.

Now, despite all the favoritism, Fixed Deposits are not the right fit for long term goals. But, if the goal is for a short term or a goal that can’t wait, FDs can be a good option in such cases. And, that is simply because it comes with the assurance of a guaranteed return.

However, if you are worried about falling interest rates of bank Fixed Deposits, you have an option of corporate Fixed Deposits.

In this blog, we will elaborate on what is a corporate FD, its similarities with bank FDs and its advantages. We will also talk about the risks involved with corporate FDs.

First, let’s understand what a corporate Fixed Deposit is

Like banks, several companies and NBFCs are also allowed to collect deposits for a fixed tenure at a prescribed interest rate. Such deposits are called corporate Fixed Deposits. Similar to banks they come with the assurance of guaranteed returns and flexibility of choosing the tenure. Plus, corporate FDs provide a higher interest rate than bank FDs.

Now let’s look at the similarities corporate FDs have with bank Fixed Deposits:

Number 1: Corporate Fixed Deposits provide a guaranteed return

One of the biggest advantages of investing in corporate Fixed Deposits is, like bank Fixed Deposits they also provide the assurance of a guaranteed return. Say you have invested Rs 1 lakh in a corporate Fixed Deposits and the concerned NBFC/corporate promises you to pay a 7 percent interest per annum. Then, no matter how the markets move or how the interest rates fluctuate, at the end of the year, you will receive Rs 1.07 lakh as promised.

Plus, at the time of investment itself, you get to know the exact amount that you will receive at maturity. This one big advantage helps you make your future financial plans more confidently.

Number 2: Higher rates for senior citizens

Like most bank deposits, most corporate Fixed Deposits offer a little higher interest rate for senior citizens. For example, if a non-senior citizen earns a 6 percent return from a corporate Fixed Deposit, usually a senior citizen will get a 6+ percent on the same investment.

For senior citizens who are retired and depend on Fixed Deposit returns for income, this is an added advantage.

Number 3: Flexibility of choosing the tenure:

The tenure of a corporate Fixed Deposit usually ranges between one to five years. And you have the flexibility to choose any duration within that range. So if your goal is one year away, you can invest for one year; if it’s 2.5 years away, you can choose your tenure accordingly. However, the interest rate will vary accordingly, i.e. higher the tenure, the higher is the interest rate.

Now that we have looked at the similarities between corporate Fixed Deposits and bank FDs, let’s look at the advantages it has over bank Fixed Deposits.

Here are the 2 advantages of corporate Fixed Deposits over bank Fixed Deposits

#1: Interest rates for corporate FDs are higher than bank FDs:

Corporate Fixed Deposits offer higher interest rates than most banks’ Fixed Deposits. For example, currently SBI, India’s biggest public sector bank, is providing interest rates of 5.1 to 5.7 percent for Fixed Deposits of various duration between one to five years. Meanwhile, the Fixed Deposit by Bajaj Finserv which is available on ETMONEY, offers returns up to 7.2 percent per annum for similar durations.

Let’s look at the table below to understand the difference in interest rates between the two.

#2: The penalty period for early withdrawal is lower in the case of corporate FDs:

Corporate Fixed Deposits In India

As per RBI guidelines, all Fixed Deposits need to have a minimum penalty period of 3 months. That is, if you withdraw your money within the first three months, you will have to pay a penalty for early withdrawal. Beyond that, it is up to the bank/NBFC/company to decide for how long its penalty period would be. The penalty period for Corporate FDs is usually lower than Bank FDs. For example, in the case of SBI you have to pay a penalty if you decide to withdraw your money anytime before the maturity period. Meanwhile, for FDs in ETMONEY, the penalty period for early withdrawal is only 3 months.

Now that you know the benefits, let’s look at the concern people have around safety aspect of corporate FDs

Do corporate FDs carry higher risk?

Corporate Interest Rates Today

When it comes to investing in corporate FDs, a lot of people are scared that since these deposits are unsecured one might lose money if the company defaults. It is important to note here, all NBFC/companies that want to collect deposits have to adhere to stringent regulations and guidelines laid down by the RBI/Ministry of Corporate Affairs (MCA). Hence, though there are more than 10,000 NBFC in India, only a handful of them can accept deposits from the public. Such measures ensure that the risk is minimum for the investors when it comes to putting money into corporate Fixed Deposits.

Let’s look at these regulations and guidelines in further detail.

Corporate Fd Rates In India

Which companies/NBFC can collect deposits?

RBI is extremely cautious when it comes to allowing NBFCs to collect deposits from the public. First of all, being registered as an NBFC with RBI is not enough, they have to have a legitimate license to accept deposits. Then, the financial assets that the company is managing has to be at least Rs 5,000 crore. Apart from these NBFCs also have to follow a few other guidelines for accepting deposits from the public. And, here they are:

The RBI guidelines that NBFCs have to follow to launch Fixed Deposits

1. The tenure of Fixed Deposits has to be a minimum of one year and a maximum of five years.
   
2. The total deposit that an NBFC can collect can be up to a permissible limit, which again varies for different NBFCs
3. The interest rate for the Fixed Deposits cannot be more than the rate prescribed by the RBI, which is revised from time to time
4. All relevant information regarding the Fixed Deposit has to be disclosed to the RBI
5. They cannot offer any extra benefits or gifts to the depositor

Meanwhile, housing finance companies with specific permits or licenses to collect deposits from the Ministry of Corporate Affairs (MCA) can only accept deposits from the public but up to a certain limit. It is a federal offense to collect deposits from the public without a necessary license from the RBI or MCA.

But that’s not all. NBFC/companies have to maintain a minimum credit rating for collecting deposits

Rating agencies like CRISIL, and ICRA give ratings to companies that can collect deposits from the public. These agencies look at the track record of the company, whether the interest rate and the repayment schedules are revealed to the investors while collecting the deposits, etc. Depending on how strong they are on each criterion, the companies are given ratings like AAA, AA, BBB, and so on. AAA is the highest rating and indicates the company has a solid balance sheet. The NBFC/companies have to maintain a minimum BBB rating to collect deposits from the public.

For example, Bajaj Finance and HDFC are two AAA companies that can collect deposits from the public. And over the years, their Fixed Deposit investors received their payments on time and they always had clarity about the interest rates and the payment schedule. So, to minimize the risk of default, one should stick to AAA-rated corporate Fixed Deposits.

These measures by RBI and MCA ensure that your investments are safe when it comes to investing in corporate Fixed Deposits.

Bottom Line:

So if you have a goal that needs to be achieved within 1 to 5 years, invest in a corporate Fixed Deposit. It provides you the protection of a fixed-income instrument and also provides a higher return than bank FDs.