As banks cut rates, NBFCs offer higher returns

Top commercial banks offer 8.5-9% interest rates a year on fixed deposits with maturity of 2-3 years

With falling interest rates, this may be your last chance to lock your savings in deposit-taking non-banking finance companies (NBFCs), an option that’s currently been giving higher rates of return than banks’ domestic term deposits. The rates offered by NBFCs on one-year fixed deposits are 75-175 basis points higher than those top banks offer on their domestic fixed deposits.

The country’s top commercial banks offer 8.5-9 per cent interest rates a year on fixed deposits with maturity of 2-3 years. Though there are some banks that offer even higher rates — Axis Bank, for example, offers 9.30 per cent a year for 2-3-year tenure; slightly higher for senior citizens — the deposit-taking NBFCs offer 9.75-10.75 per cent a year in the same maturity tenure.

For example, Shriram Transport Finance Company Ltd (STFCL), an ‘AA+’-rated deposit-taking NBFC, offers 9.75 per cent and 10.75 per cent on fixed deposits for two years and 3-5 years, respectively. But, State Bank of India offers 8.50 per cent in the same tenure, while ICICI Bank and HDFC Bank offer 8.75 per cent.

“For an investor in the higher tax bracket, if he is conservative and expects consistent returns, NBFCs’ fixed deposits would be fine. But, he need to be content with lower post-tax rates. For him, debt funds may be more attractive due to a capital gains tax treatment. The problem there is, it does not offer a specific return and the returns can vary,” says Suresh Sadagopan, founder of Ladder7 Financial Advisories.

These high rates, however, may not sustain for long, as the Reserve Bank of India (RBI) might cut interest rates further. In 2012-13 so far, RBI has already slashed the repo rate by 75 basis points. And, as the inflation rate falls, it is expected there would be another rate cut in RBI’s mid-quarter review of the monetary policy on March 19.

“As interest rates go down further, the rates on these fixed deposits would also go down. Of course, it depends on the strength of the NBFC you are talking about. The higher the rating of the NBFC, the greater are the chances of its fixed deposit rates falling,” says Amar Pandit, CEO of My Financial Advisor, a private wealth management firm.

But one thing the investors must remember while investing in the fixed deposits offered by NBFCs is that the rating of the NBFC should be at least ‘AA+’. This is because when you invest in a bank fixed deposit, the Deposit Insurance and Credit Guarantee Corporation ensures Rs 1 lakh per bank is repaid to the investor in the scenario of default. But, unfortunately, there is no such guarantee for fixed deposits of NBFCs. “When one invests in deposit-taking NBFCs, we do not recommend any NBFC that has a rating below ‘AA+’. The fixed deposits offered by deposit-taking NBFCs are particularly suitable for investors who are in the lower tax bracket,” said Sadagopan.


                                             A WAR OF INTEREST

Bank/NBFC	Maturity	Interest Per Annum (%)
State Bank of India	1 to 2 years	8.50
	2 to 5 years	8.50
ICICI	1 year to 389 days	7.50
	390 days 2 years	9.00
	2 to 5 years	8.75
Shriram Transport Finance	1 year	9.25
	2 years	9.75
	3 to 5 years	10.75
Mahindra Finance	1 year	9.25
	2 years	10.00
	3 years	10.25