The NBFCs are Offering a Higher Interest Rates on FDs than Banks: Should One Invest?

On one hand where many Non-Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs) are offering higher interest rates on FDs as compared to the FDs of banks, inclining towards NBFCs for FDs is quite natural. However, before finalizing an NBFC for investing your money in FD, it is suggested to perform diligence checking on the credit ratings of these companies.

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This is to ensure that the company that is offering the best FD rates and hence you are going get its FD is stable and worth to invest or not.

Companies like Bajaj Finance Limited are offering interest rates on their FDs of approximately 8.75% than government banks like SBI FD rates are 6.85% for its five-year FD. Some other names of non-banking financial companies that are offering higher interest rates on their FDs as compared to many banks are Mahindra Finance, PNB Housing Finance, LIC Housing Finance, and Shriram Transport Finance.

In this way, the FDs of NBFCs may look more attractive to you than the bank FDs but before finalizing an NBFC it is suggested to perform due diligence to make sure your deposited money is safe with them:

Credit Ratings:

The rate of interest of FD is probably the first thing that catches the eyes of the investors. However, this should not be the only factor to drive your decision of investing in Fixed Deposits especially when you are considering NBFC FD. For this, you have to consider NBFCs credit ratings. Generally, the organizations that are rated AAA are considered as safest especially in providing on-time services of financial obligations. These organizations are considered the best for investing.

However, there are times when the top-rated organizations have failed to prove secure. Same as companies, the NBFCs as well have credit ratings. The NBFCs get credit ratings from different rating agencies that they display prominently. The analysts believe that the companies even having good ratings can also default, but a company with good rating give the sense that the company is healthy. The founder of Plan Ahead Advisors, Vishal Dhawan says that when the debate is there whether the AAA rating has any value, the fact even then remains the same that not all the AAA rating companies are defaulters. However, in general, this rating is a fairly valuable indication to look at.   

NBFCs and Retail Deposits:

The retail deposits make only around 10 – 15% of Non-Banking Financial Companies total requirement of funding, 40 – 50% of the funding of this sector comes from the banks, and the rest comes from the debt capital market. The fund cost or the interest that is paid for the borrowed funds for the NBCs are generally lower when they are borrowed from the debt capital market and banks as compared to the deposits made by the public. However, earlier it was difficult for the NBFCs to raise funds from the debt markets or through the banks.

While the non-financial banking sectors have started seeing retail deposits as a constant source of income after the demonetization, the liquidity that has brought down the rate of interest is now dried up. This has increased the borrowing cost from the capital market, which is a few cases that can be higher than the rates that are paid for FDs. In this way, the NBFCs are focusing on public deposits as these, most of the time, are stickier and are for the longer term. Even the NBFCs are now launching public drives and highlighting their credit ratings while they are marketing for FDs.

Now, What Should One Do?

In such situations, you should not blindly go for the companies that are paying higher interest rates that these NBFCs are offering on their FDs. You must be aware of the fact that they are offering higher interest rates because they are under pressure. The high ratings of credit may inspire confidence but only looking at it is not sufficient. The investors must be more careful about the ratings and should consider the news that is flowing for these companies. You may not easily understand the financial health of a company and it may take a lot more effort than you think.

Alternatively, you can opt for short-term bond funds than NBFC FDs. These funds diversify the risk from a single organization to multiple organizations. As the rates of FDs go up, the rate of these short-term bonds also goes up. The best is to take professional help while investing in investment products that are difficult to understand.

Written By: PolicyBazaar - Updated: 02 July 2021
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