Introduction

Fixed deposits (FDs) are one of the most common ways by which people save money in India, especially for their children’s education or retirement.

On 10th February 2022, RBI did not change the repo rate and it remained at 4%. This news can be good for fixed deposit holders, as banks will likely stop lowering FD interest rates.

However, inflation has surged in the past few months, and many investors are seeing negative real returns. One option for FD investors is to invest in corporate FDs, which provide a higher interest rate.

Moreover, many retail investors are investing in these products right now because of geopolitical tensions and high volatility in both equity and debt markets.

What are corporate fixed deposits?

A corporate FD or a corporate fixed deposit is a type of deposit that is similar to that offered by banks. 

Companies and Non-Banking Financial Institutions (NBFCs) collect deposits from individuals for a fixed term with a fixed interest rate. This type of deposit is called a corporate fixed deposit (corporate FD). 

They assure guaranteed returns and flexibility in deciding the tenure, just like bank FDs. They act as a savings product for individuals. 

Further, issuers of corporate FDs are given credit ratings by agencies like CRISIL, CARE, ICRA, etc., which shows the riskiness of the deposit. 

Features of corporate fixed deposits

The features of corporate FDs are as follows:

• NBFCs and some companies issue corporate FDs after they fulfill the RBI guidelines.
• The corpus accumulated at the end of the tenure can be utilised for any purpose, such as higher education, vacation, marriage, house repair, etc. 
• Corporate FDs provide a fixed interest rate to individuals, which means they are not exposed to market risks and are suitable for low-risk appetite investors. 
• In many aspects, corporate FDs are similar to bank FDs, but they provide a higher interest rate than bank FDs.
• Corporate FDs provide flexible terms for depositing money, thus ensuring that investors can choose to invest in the product depending on their plans, any goals they may have, etc. 

Further, some corporate FDs also offer premature withdrawal without restrictions.

• They are rated by credit rating agencies, representing how credible and effective an investment instrument is. 

Corporate fixed deposits Vs Bank fixed deposits

There are many advantages of corporate fixed deposits compared to bank fixed deposits. However, corporate FDs also have some disadvantages. 

Let us examine the differences between the two of them.

1. Interest Rate

One of the critical factors while deciding on any investment is the returns the investor will make. 

Corporate FDs usually have a higher interest rate than bank FDs, so individuals’ investments will grow faster if they choose to invest in a corporate FD. 

With an interest rate that remains fixed and locked throughout the entire duration of the chosen FD, unbeatable returns on corporate fixed deposits make it more attractive. 

As of 30th March 2022, the interest rate on bank FDs varies from 2.50% to 6.50%, and the corporate fixed deposits interest rates in India range from 5.45% to 8.09%. 

Thus, the first difference is that corporate FDs provide a higher interest rate than bank FDs. 

2. Withdrawal

When people are in an emergency and need funds, they generally withdraw their amount from a fixed deposit. However, this could mean that banks and entities can charge a penalty to them.

Under RBI guidelines, there is a minimum penalty period of 3 months for all fixed deposits. Thus, if individuals withdraw money before that, they will be charged a penalty. 

Beyond that, banks and NBFCs have their policies about how long the penalty period will be. Usually, the penalty period for corporate FDs is shorter than for bank FDs.

3. Risk 

Analysing the risks of investment is a wise move before a person invests. A fixed deposit is a safe investment, but it also has some risks. 

Corporate fixed deposits are unsecured, and there is a possibility that the company can collapse and that investors might not get the money back.

Conversely, RBI’s subsidiary Deposit Insurance and Credit Guarantee Corporation (DICGC) insures bank fixed deposits up to Rs. 5 lakhs. 

Thus, corporate fixed deposits carry a higher risk than bank fixed deposits.

4. Credit Rating 

The last difference between bank FDs and corporate FDs is credit ratings. Corporate FDs are given credit ratings, whereas bank FDs are not given any credit ratings.

Credit rating agencies issue ratings that let investors know the financial health of an issuer. The higher the rating, the less likely the company is to default, which means more excellent protection for their investment.

Credit agencies assign these ratings by analyzing the issuer’s financial stability, including its background, repayment history, management quality, etc. 

How to invest in corporate fixed deposits? 

Individuals can invest in a corporate fixed deposit by visiting a nearby issuer’s branch or by logging on to their online account.

Who is allowed to collect corporate deposits?

When it comes to collecting deposits from the public, the Reserve Bank of India (RBI) is very vigilant.  

To be registered with RBI, the NBFC has to have a legitimate licence and has to manage at least Rs. 5,000 crores in financial assets. 

Further, it has to fulfill some other criteria as well, like:

• The total deposit an NBFC can collect can vary depending on the company, but it is limited to a specific limit that varies across organisations.
• All information about the deposit must be disclosed to the RBI.
• NBFCs are not allowed to provide any extra benefits or gifts to the depositor.
• To collect deposits from customers, NBFCs have to sustain a minimum credit rating.

It is essential to note that collecting deposits without a licence is a federal offence.

Conclusion

Bank FDs and corporate FDs both have their own set of benefits and downsides.

It is essential to weigh which option better suits one’s investment style, goals, and risk appetite when choosing an investment option. 

Corporate FDs are often a good fit for investors with a lower to medium risk tolerance, who are looking for higher returns than bank FDs. However, always remember that there is no DICGC insurance for corporate FDs. So make sure to research a company’s financial fundamentals and credit rating before opening a corporate FD. 

Evaluating multiple factors before investing in a bank/corporate FD is vital. Investors can examine factors like the interest rate offered, the issuer’s credit rating, repayment history, past performance, etc.

Examining all these factors will help investors make an informed decision and help safeguard their money.