Distributors squeezed by lower company deposit commissions

After facing a cut in fees for mutual funds and insurance products, brokers see a decline in those on sales of firms' fixed depoists

The going has got a lot tougher for distributors of financial products. After facing a squeeze in commissions on mutual funds and insurance products in the past few years, these brokers are seeing a decline in fees on sales of companies’ fixed deposits (FDs). This is partly because companies have arm-twisted distributors into cutting commissions, as most other financial products have also seen a decline in sales charges.  

These days, FDs of companies are fetching distributors about one-two per  cent per application form. Companies had to pay as much as three-five per cent till early last year. Commissions on deposits of high-rated paper are even lower, at 10-15 basis points (100 basis points = one per cent).

Distributors said companies have put forth the argument that there was no logic for their charging such high fees when mutual fund schemes, especially debt, were fetching lower commissions and demand for insurance products were on the wane.

Mutual funds usually pay 1.5 - 2 per cent, including trail, to distributors for selling a diversified equity mutual fund scheme. The fees are much lower for debt products. The outsourcing of deposit-raising operations by companies to large distributors has also resulted in commissions declining.  

“With overheads on the management of FDs coming down, this product has become cheaper and convenient for raise money for corporates,” said Sanjiv Bajaj, managing director, Bajaj Capital.

The fall in commissions on fixed deposits has hampered distributors’ ability to pay kickbacks to the investors, a practice that has been a key driver for demand for these products.

“There are hardly any pass-backs in FDs these days,” said Bajaj.

What is helping distributors to survive on lower commissions on companies’ FDs is that demand for the product has remained steady. Brokers said a hazy stock market outlook and higher returns compared to bank deposits had resulted in many investors going for company deposits, despite the risk.

“Fixed income as a product category has grown in the last few months. Of this, corporate FDs as a sub-category has done well, especially those of good-rated companies,” said Pawan Joseph, head of sales-India, private wealth management, Motilal Oswal Securities.

Corporate FDs gained popularity among investors in the 1980s and 1990s as interest rates remained stubbornly high, making bank credit expensive. This prompted companies to turn to raising deposits from retail investors.

“However, in the late 1990s, following defaults by NBFCs (non-banking finance companies) and other manufacturing companies, regulations were introduced to make the product stronger. But this made it difficult for companies to collect money,” added Bajaj.