MUMBAI: Thirty-three-year-old Priya Prakash, an executive at a financial services firm, had some surplus funds to invest on which she wanted reasonable returns. The advice she received from family members is that she should invest them in a fixed deposit scheme of a company where the yields were more and not a bank.
The number of people like Prakash are growing with companies such as Shriram Transport Finance, Mahindra and Mahindra Financial Services and Dewan Housing Finance offering 200-300 basis points more than what banks provide for three- or five-year deposits. Company deposit applicants have trebled.
“The intent was to look for higher returns. I was advised to invest money in these company fixed deposits,” says Prakash, who is comfortable with the 12.5% that she is getting from the company FD. “It was mainly the interest factor that got me to invest in company FDs. I was looking for higher returns and a strong background of the company.”
Company fixed deposits that used to be a rage in the late 90s lost their charm as businesses begin to access funds easily from the banking system. Also, instances of fraud forced regulators to come up with tough guidelines and link it to their net worth. But high inflation in negative real returns from bank deposits are making company deposits attractive again.
So much is the attraction that when investors are pulling out funds from mutual funds, and bank deposits are growing at near-decade lows, the number of depositors for Mahindra Finance rose 60% year-on-year to 200,000 depositors.
HDFC’s deposits grew 37% to Rs 49,763 crore in December 2012, from ?36,293 crore a year earlier. Dewan Housing Finance’s deposits nearly trebled to Rs 1,900 crore in March, from ?760 crore a year earlier. This is in contrast to banks where deposits grew 15% y-o-y.
“The interest for good corporate FDs has increased,” said V Ravi, CFO, Mahindra Finance. “We get 400-450 forms every day from 100-150 last year. There are three factors why these are popular — stable avenue of income, safety of the investment due to the high reputation of the corporates and the interest rate arbitrage that has come down in debt schemes, owing to revision in dividend distribution for mutual funds,” he added.
Best-rated fixed deposits from Mahindra and Mahindra Finance offer 12.2% per annum and fixed deposits issued by Jaypee Group offer rates as high as 15.07% on a three-year FD on a cumulative basis. Against this, banks such as SBI offer 8.75% deposits of similar tenors and private banks like HDFC Bank are offering anywhere between 8% and 8.75%. Shriram Transport Finance FDs offer up to 11.94%, while Dewan Housing Finance offer 11.98% on an annualised basis for three-year deposits.
“In terms of rates, they are far more attractive than bank FDs. The plain vanilla blue-chip (company) FDs are not very attractive, but the ones offered by the real estate companies are being taken up by investors who have enough risk appetite. For ultra HNIs, they know that fixed deposits are also instruments that are tax-efficient,” said Maneesh Kumar, MD, Burgeon Wealth Advisors.
But there are experts who say that the biggest risks investors run are that of lack of liquidity. Investors cannot withdraw the money quickly unlike in bank deposits. These investments become riskier at times, when the economic slowdown puts pressure on their cash flows as well.
“Investors have to make sure they are compensated well enough for the risk they are taking,” said Devendra Nevgi, a financial expert for over two decades. “Another problem is the poor supply of corporate FDs. This is largely because companies have many more avenues to raise resources now than ever before. This becomes a problem for investors who are investing in these deposits, because when the tide turns, these companies may have liquidity issues.”