 "Look at credit rating carefully before investing in NCDs")
Retail investors looking to earn higher interest rates could be attracted by the Non-Convertible Debenture (NCD) issues of Non-Banking Finance Companies.
Srei Equipment Finance's Rs 500 crore secured NCD issue is open and will close on January 20. The other two in the pipeline are Muthoot Finance, which is looking to raise Rs 1,300 crore through secured NCDs and Rs 100 crore through unsecured NCDs and ECL Finance which is looking to raise Rs 2,000 crore through secured NCDs. Both Muthoot and ECL will raise the funds in more than one tranche.
Srei Equipment is offering a coupon of up to 9.75 per cent, while Muthoot Finance and ECL Finance have not announced their coupon rates yet. In comparison, the highest rates offered by banks on fixed deposits are 7-8.25 per cent, across maturities. So, the rates offered by Srei is 100- 200 basis points higher than that offered by banks, which makes the returns look very attractive.
"Retail investors must not fall for returns alone. Credit risk is of utmost importance because, in the case of default, investors will not get any return", says Tanwir Alam, chief executive officer, Fincart.
A rating above AA is considered good to invest, provided the rating is by one of the top rating agencies. All the three issues are secured NCDs, except the Rs 100 issue by Muthoot. This should be a matter of comfort. But one should also look at what is the security. If it is either real estate or plant and machinery, then it is a matter of comfort for investors.
It is advisable to opt for a three-to-five year's time frame for the investment because beyond that predicting credit risk is risky.
Investors must also remember that the interest from the NCD will be taxed as per slab. Hence, it is more suitable for those in the lower tax bracket.
