For decades, bank fixed deposits have been the most popular option for household savings. However, the current fall in interest rates of bank FDs has made it little unattractive, which has led to people turning their focus towards FD schemes offered by NBFCs and small finance banks. Such FDs are also known as Company FD.
NBFCs like Bajaj FinServ, Mahindra Finance or Small Finance Banks such as Ujjivan Small Finance Banks, Equitas Small Finance Banks offer a higher interest rate on FDs compared to banks FDs.
|State Bank of India||HDFC Bank||Bajaj FinServ||Utkarsh Small Finance Bank|
|180 days-210 days||5.80||6||-||7.25|
|1 yr - 2 yr||6.50||6.45||8||8.50 - 9.00|
|3 yr - 5yr||6.25||6.75||8.35||8|
|5 yr - 10 yr||6.25||6.75||-||8|
In the comparison table, the company FDs look pretty attractive over bank FDs. But, how do they offer such high rates, why banks are unable to do so and are they safe to invest in.
How Company FDs Offer Higher Interest Rates?
As we all know, fixed deposits kept in banks or NBFCs are all used for extending credit facility to borrowers. Therefore, the part of interest charged on the loans given by banks is credited as interest on the fixed deposits.
The difference in interest rate is because of the nature of business and customers they deal with. Both banks and NBFC or small-finance banks have a different set of customers to which they offer loans.
Banks focus on wide user-base consisting of both retail customers and corporate & business clients. The terms of the loans offered by banks are standardised and interest charged is as per the RBI rules and regulation.
Whereas, NBFCs and small-finance bank primarily focus on a particular segment. For instance, small-finance banks focus on offering unsecured loans to the economically weaker section of the society and NBFCs like Bajaj FinServ or Mahindra Finance focuses on credit card loans and auto loans. This allows them to charge a higher interest rate on the loans and in turn, offers a higher interest rate on the fixed deposit.
Is Company FD a Safe Investment Option?
Indeed, the company FDs have a higher interest rate compared to the bank FDs, but they are not completely safe. The risk of losing money including the interest income is higher, in case the company defaults.
For example, DHFL, once a leading home finance lender stopped accepting new deposits, processing renewals and premature withdrawal request for existing FDs following a series of default on interest payment and downgrade of credit ratings.
Further, the company FDs are not protected under the Deposit Insurance and Credit Guarantee Corporation. In short, the company FDs are just like an unsecured loan extended to the NBFC or company, that doesn’t guarantee anything to the investor in case of default.
How to Analyse Company FD?
Being a risky investment option compared to bank FDs, analysis of scheme documents and company background is important. And, you need to be more careful regarding your investments.
First of all, you should check the background of the NBFC you want to invest your money. Its past financial performance, interest payment capability and schedule, any red-flags raised by regulatory authorities.
Second, you should check the credit ratings of the deposit scheme awarded by rating agencies like ICRA, CRISIL and CARE.
CRISIL prefixes its fixed deposit rating with “F” and “FAAA” rating signifies highest safety rating standard. Similarly, FAA rating also indicates high safety standard but is not as good as FD schemes with FAAA rating.
Investors with a low-risk profile and those who are dependent on the FD interest income to meet their monthly expenses, such as senior citizens should not invest in company FDs. Because in case of a default, the impact of loss will be far greater and worse.
In case, investing in a low rating deposit scheme, invest for a short duration to limit the risk.
Bank FDs are known for its safety and guarantee of returns irrespective of the external market scenarios. But, company FDs lack such features and is an unsecured nature of the investment. Higher the interest rate on company FD, higher is the risk on the investment.
Therefore, before investing, you need to go through the application documents and all information carefully and also seek professional advice.