Investors investing in company FDs

Now people have started investing in fixed deposits (FDs) as many corporates have raised interest rates by half a percent on their offerings.

A bunch of companies like Tata Motors, HDFC, Jaiprakash Industries and Hudco are currently raising money through FDs and offering interest rates of 9-12%, according the tenure. If investment advisors are to be trusted, FDs are being considered to be the best option by the investors because of the attractive rate of interest, as well as the current state of stock market.

Anil Chopra, CEO of Delhi-based Bajaj Capital pointed out, “There are no firms that compile data on the total money raised through companies’ fixed deposit schemes, but guesstimate is that the amount would double to around Rs 5,000 crore in 2008-09 as compared to 2007-08”. He added, “Company FDs became popular following the crash in equity markets. The demand began in mid-2008. The trend is similar to bank FDs that were offering higher interest rates”.

The companies that are able to raise money through fixed deposits can be categorized into three categories: manufacturing, non-banking finance and housing finance companies. As per rules manufacturing companies, can raise up to 25% of their net worth (share capital and free reserves). While NBFCs can raise up to one to three times of their net worth and housing finance companies are permitted a multiple of 10 times. In case of NBFCs and housing finance companies, a better credit rating bestow them the scope of raising higher amounts from the public. On the other hand manufacturing companies can’t accept deposits for over three years, whereas NBFCs can accept up to five years and HFCs can raise money up to seven years.

However, investment advisors tell investors to be careful about the tax implications before investing their money in company FDs.

An investment advisor cautions, “Don’t go by the rates, see how much you would earn after paying the taxes. For example, if you are in the higher tax bracket, your interest income would be charged at 30%. That would mean that you would earn around 8.5% even though the interest rate is 12%. Company FDs work best for people in the lower income bracket’’.

Investment experts also advise the investors not to compromise on the credit rating. Credit rating is not compulsory for manufacturing companies, whereas it is a must for NBFCs and HFCs. The investment consultant notified that “A lower-rated company may offer higher rates, but you should remember the risk involved in it. A lower-rated company can actually default on payment, including repaying the amount”. Chopra of Bajaj Capital says that people shouldn’t think that interest rate is higher for long-tenure deposit. He further says, “People feel that they earn higher rate if amount is locked in for a long period of time but that’s not the case. Some companies offer low rate for longer duration”.

Reinvest your maturing FD carefully

Be careful in signing up any documents offered by bank officials otherwise your fixed deposit (FD) might convert into life insurance policy.

Now you might think what a FD has to do with life insurance? But it might have to do as it happened with Mangesh Pai.

Pai, a heart surgeon, went to a large private sector bank to get his maturing FD into another FD, but to his shock he ended up putting his entire maturity amount into a life insurance policy instead. He was made to sign on some papers produced by the bank officer who told him that this would be like an FD with life insurance cover and a minimum 10 per cent interest.

As Pai is a busy person therefore he never went through the papers he received from the bank. About a year later, he received a notice from an insurance company intimating him that the renewal premium for his unit linked insurance policy (ULIP) was due.

He was shocked after going through the notice but couldn’t immediately figure out when he bought a policy from this insurance company and that too for such a huge amount (the FD maturity amount was huge) over a 20-year tenure.

Then he remembered, that the bank had cheated him into putting money into an ULIP, with charges as high as 35 per cent and offering a very low life cover. Hence he filed a complaint with the Reserve Bank of India and is fighting against the bank.

Usually, banks hire young and inexperienced people as ‘financial advisors’ or ‘relationship officers’ to sell insurance schemes, which fetch them huge commissions. Thereon these people get targets and incentives, in turn which leads to them to mis-sell insurance. It’s the same with ‘relationship managers’ of broking firms; they are given the training to sell aggressively and end up pushing insurance schemes for the huge commissions these offer.

But for the consumer, it is a losing proposal all the way. In fact there are instances where ULIPs have been sold forcefully.

There is an incidence where Priya Arora, once got call from a multinational bank of which she owns a credit card. In spite of being not interested in the insurance product was pitched to her, she discovered insurance premium being debited in her credit card bill.

Another Faraz Ahmed, who went to a public sector bank for opening a savings a/c, was asked to take an insurance policy. “You need to take this product along with a/c opening,” said an officer at the bank.

Meanwhile the opening up of private life insurance companies has definitely increased insurance penetration in India, which has also led to the increase in mis-selling of insurance products. Companies are aggressively expanding their sales network, as a result of which one finds college students, housewives, doctors, teachers, and people with part time jobs doubling up as insurance agents. As long as the executives get their commission, why bother about who is being sold what?

Here is an example of Kamlesh, the sole earning member in his family, who has to shell out a big Rs 70,000 annually for an insurance cover of just Rs 5 lakh. And most of his policies are ULIPs.

Unsurprisingly, most agents are normally trained on two or three ULIPs and they sell only those products. And if enquired about endowment or term plans, and most of them don’t know as these exist. As they know only about ULIPs they will tell you these are best, for these have given 30 per cent returns in the last 5 years.

Therefore, don’t buy insurance from such part-time agents. There are chances that will end up buying the wrong product or suffer bad service from the agent. Also, if it’s a part-time pursuit, they can easily disappear, leaving you in the lurch.

If indeed you want to buy insurance, determine your goals, requirements and how much insurance you need before writing out the cheque. The calculation should feature in your cost of living, expected cost of living, income, expected increase in earnings, dependents and their needs etc first.

Most of us make mistakes while signing up for policy as we are not aware how big a cover to take; in fact, most would go by the premium being quoted or whatever cover the agent suggests. Hence most of us end up being underinsured.

However a well trained financial planner is a big help here, for the strategy suggested by him/her could tell you not just about your insurance needs but also other investment areas.

Be careful never fall for the aggressive sales pitch of either insurance agents or bank officials.

SBBJ raised its fixed deposit rates by 100 bps

State Bank of Bikaner and Jaipur (SBBJ) is the largest associate bank of SBI, raised its fixed deposit rates by 100 basis points to 10.75 per cent.

SBBJ informed the Bombay Stock Exchange that in between 2-3 years the fixed deposits rates has been increased from 9.75 per cent to 10.75 per cent.
Whereas bank has not touched the interest rates for other maturities they are at the September 3 level when it last raised rates.

In the previous month, SBBJ had raised the interest rate on term deposit in between 1-2 years by 50 basis points to 10.25 per cent.
The increase in fixed deposits in between 2-3 years was also done by 25 basis points to 9.75 per cent.

While in the beginning of this month, the State Bank of India, country’s largest lender, introduced special deposit schemes that offered 10.5 per cent interest rate for maturity of 1,000 days.

However, tight liquidity conditions have compelled many banks including Punjab National Bank, Canara Bank and Union Bank of India to raise their short-term interest rates.

PNB has raised the fixed deposit rates in between 25-75 basis points for various maturities.

After the revision of rates it is up at 10.50 per cent in the slab of 1 year to less than 2 years.

Canara Bank too has announced a festival offer of a 10.5 per cent interest rate.

Syndicate Bank revised interest rates on domestic term deposits

Syndicate Bank has increased the interest rates on domestic term deposits for a period of 180 days to less than two years. The revised rates will come into effect from 5^th September, 2008.

A bank release stated the interest on deposits for one year to 399 days has been revised to 10.05 per cent per annum (from 9.50 per cent), for 400 days to 499 days the interest rate will be 10.10 per cent per annum (9.60 per cent) and for 500 days to less than two years the rate will be 10.15 per cent per annum (9.75 per cent).

The interest on deposits from 180 days to less than one year has been increased to 8.50 per cent per annum (6.50 per cent).

Bank sources said senior citizens will be eligible for one per cent additional interest with a maximum of 10.50 per cent per annum (10.25 per cent).

Take a loan against fixed deposit

Currently the interest rate on most of the personal loans is being charged between 18% and 25%. While the floating rate on home loans is around 12%. The difference is clear.

In giving personal loan bank has a greater amount of risk than giving a home loan. If due to any reason the borrower decides to default in the repayment of a personal loan the bank has to face problem as it does not have taken any collateral or security, i.e. it does not have anything to sell off and reclaim the amount loaned out.

Therefore the risk on such loan defaulters is charged through interest rate by the bank. Hence, individuals who repay the personal loan on time also pay for even those who don’t. On the other hand home loans are cost less than personal loans as the bank have taken collateral or security which it can always sell the house bought with the home loan and reclaim the amount still to be paid.

Although, there are positive ways in which individuals can take a loan and use it for personal purposes and also avoid paying an interest as high as that on personal loans.

One of the easiest ways is a loan against a fixed deposit. Bank can have an option of liquidating the fixed deposit in case the borrower defaults. Thus the interest rates charged on such loans are usually a few percentage points higher than the interest rates of the fixed deposits.

This is definitely much lesser than the interest rate charged on personal loans. So in case you have a fixed deposit lying with you and you are not going to use it for meeting a personal need, you can use it to get a loan from a bank.

Mostly all loans taken against collaterals always can turn out to be cheaper than personal loans. For this inform the bank that you will be repaying the loan within the set time — not verbally but by action. Keep a security, which the bank can claim if needed.

In turn banks will easily give you a loan at a lower rate, as they are confident that you would rather pay off to get back the security that you have tendered.

You can take such loans by tendering life insurance policies, National Savings Certificate, RBI Bonds, gold jewellery, bank fixed deposits, shares and debentures.
Some of the banks even accept mutual funds as security.

On such loans along with the lower interest rate, the processing fees charged for loans against security (up to 0.5% of the loan amount) are also low as compared with those on a personal loan (1-2% of the loan amount).

Although the rate offered on such loans is quite low then also such loans are not very popular. That is why banks have not been promoting such loans actively.

Previously such loans were popular in at the time when the banks were not actively offering personal loans. Maybe it’s time, they might comeback.

Bank of Rajasthan increased deposit rates by 0.75 per cent

Bank of Rajasthan on Saturday announced a hike in its deposit rates. Bank release states that a new slab of deposit of 1-2 years has been included with an interest rate of 10.25 per cent per annum. Release stated that senior citizens will get an interest of 10.60 per cent.

In the bank release it was also stated that the interest rates on other fixed deposits across different tenures have also been hiked and will come into effect from August 25. For tenures of 121-179-days, bank has increased the rate from 7.50 per cent to 8 per cent and for 180-364-days, the increase in the rates have been done by 0 .75 per cent from 8.25 per cent to 9 per cent. The release added that the rates for tenure over three years the rates have been increased from 9 per cent to 9.25 per cent.

Karur Vysya Bank increased term deposit rate & BPLR

The Karur-based, Karur Vysya Bank has increased its interest rates on term deposits. Bank has increased the interest rate for senior citizen deposits to 10.25 per cent from the current 10 per cent on 1 year and above but less than 2 years deposits. The rates will come into effect from August 11. So when you are planning to invest in fixed deposits to earn safe interest on your hard money.

Bank has increased interest rates by 10.50 per cent from 10.25 per cent on deposits of 2 years and above and inclusive of 3 years. While interest rates on deposits for periods from 181 days and above but less than 1 year has been increased by 50 basis points to 8.50 per cent. On deposits of 1 year and above but less than 2 years rates bank is offering 9.75 per cent which has been increased from 9.50 per cent and deposits of 2 years and the interest rate above and inclusive of 3 years has been increased to 10 per cent from 9.75 per cent.

Bank has hiked the Benchmark Prime Lending Rate (BPLR) to 15.25 per cent with effect from August 14.

Yes Bank ups interest rates on fixed deposits

Private sector lender Yes Bank has increased its fixed deposit interest rate by 0.25 per cent on a tenure of one year and one day up to 18 months to 10 per cent from the earlier 9.75 per cent.

Senior citizens will earn a return of 10.50 per cent now as against the existing 10.25 per cent, a bank release said here.

The new rates are effective from Friday.

The new-age lender has also upped interest rates on fixed deposits for tenors ranging from six months 1 day to 2 years.

“The bank has been observing keen interest among customers to invest in deposit products and we believe this trend will sustain given the safety, security, liquidity and flexibility provided under the bank’s deposit programmes,” Yes Bank Managing Director and CEO Rana Kapoor said.

The private lender has also upped its benchmark prime lending rate (BPLR) by 0.50 per cent to 17 per cent with effect from Friday.

Banks hike FD rates to cope with high inflation

After increasing the lending rates, banks have started increasing deposit rates. This will bring some cheer for depositors — particularly for the retired persons and those who mainly depend on interest income.

The deposit rates may be revised upwards further, if inflation continues to rise. High rate of inflation affects the net return of a depositor. With inflation at 8.75%, net return to a depositor has already been reduced substantially. It is believed that if inflation persists at the current rate, banks will have to revise both the lending as well as deposits rates upwards again.

After SBI, which had increased the deposits rates last month, Oriental Bank of Commerce, Yes Bank and Bank of India have increased deposits rates by half a percentage point to one percentage point.
Oriental Bank of Commerce has raised the rates for its special deposit scheme Asha Kiran (FDs for 400 days) to 9.75% for senior citizens.

For the common man, the interest rate on 400-day deposits is 9.25%.

Yes Bank increased the rates by 0.5 percentage points across all maturities. After this, senior citizen depositors of Yes Bank would get a maximum of 10% on fixed deposits with a maturity of one year to 18 months. The others would receive 9.5% return.

SBI revised FD rates for 5-10 years by 0.5 percentage point to 9% while 3-5 years tenure was hiked by 0.35 percentage points. Senior citizens will get 0.5 percentage more.

Bank of India also increased deposit rates up to 0.5 percentage point for various maturities. For maturities between one year and two years, the revised rates would be 9.15%, against the earlier rate of 8.50%. For two to three years, the new rate is 9.25% as against earlier rate of 8.75%.

Similarly, fixed deposits of Bank of India of the maturity of three to five years will earn 9.50% interest, against the earlier 8.75%.

Recently, Reserve Bank of India had hiked the overnight lending rates for banks by 0.25 percentage points. A senior banker said this has led to rise in both the deposits as well as lending rates.

If the inflation continue to rise and crosses 10% mark, there will be another bout of increase in the interest rates in the country.

Sidbi slashes PLR & deposit rate

Small Industries Development Bank of India (Sidbi) has reduced its prime lending rate and interest rate on deposits by 0.50 per cent and 0.25 per cent respectively. Currently 12.5 per cent, the PLR would be reduced to 12 per cent with effect from 28 January, an official communique from Mumbai said here today.
Meanwhile, the interest rate on deposits has been reduced by 0.25 per cent across the board and across all maturities from 19 January. Sidbi currently offers interest rates in the range of eight to nine per cent on fixed deposits depending on the duration of the deposit.

Established in 1990, Sidbi’s mission is to empower the micro, small and medium enterprises (MSME) sector with a view to contribute to the process of economic growth, employment generation and balanced regional development. Sidbi finances the MSME sector through a wide network of other primary lending institutions such as banks, state financial corporations (SFCs) and micro finance institutions (MFIs).