What Are Corporate Fixed Deposits ?

Fixed Deposits have always been the most popular form of investment in India. From saving for a vacation to retirement, they have served as a one-stop shop. Despite all the favouritism, Fixed Deposits are inappropriate for long-term objectives. However, FDs may be suitable if the objective is short-term or must be completed on time. This is because it comes with the assurance of a guaranteed return. However, if you are concerned about declining bank Fixed Deposit interest rates, you can choose corporate Fixed Deposits. Like banks, several corporations and NBFCs are permitted to accept fixed-term deposits at a prescribed interest rate. This type of deposit is known as a corporate Fixed Deposit. Like banks, they provide the assurance of guaranteed returns and the option to choose the duration. Additionally, corporate FDs offer a higher rate of interest than bank FDs. Now let's examine the similarities between corporate FDs and bank Fixed Deposits. - Corporate Fixed Deposits offer a return that is guaranteed. One of the greatest benefits of investing in corporate Fixed Deposits is that similar to bank Fixed Deposits, they offer the assurance of a guaranteed return. Suppose you have invested Rs 1 lakh in a corporate Fixed Deposit, and the NBFC/company guarantees you a 7 per cent annual return. Then, regardless of market movement or interest rate fluctuations, you will receive Rs 1.07 lakh as pledged at the end of the year. - Rate increases for seniors. Similar to most bank deposits, most corporate Fixed Deposits offer a slightly higher interest rate for senior citizens. For instance, if a non-senior citizen receives a 6 per cent return on a corporate Fixed Deposit, a senior citizen will typically receive a 6 per cent or more return on the same investment. - Flexibility in selecting the lease term: Typically, a corporate Fixed Deposit duration ranges from one to five years. And you have the option to select any duration within the given range. If your objective is one year away, you can invest for one year; if it is two and a half years away, you can choose your investment period accordingly. However, the interest rate will vary proportionally, such that the longer the term, the higher the interest rate. Now that we've examined the similarities between corporate Fixed Deposits and bank FDs let's examine the advantages of corporate FDs over bank FDs. - Corporate FDs have higher interest rates than bank FDs: Corporate Fixed Deposits offer higher interest rates than most bank Fixed Deposits. India's largest public sector bank, SBI, currently offers interest rates ranging from 5.1% to 5.7% on Fixed Deposits with terms ranging from one to five years. The Fixed Deposit by various NBFCs offers annual returns of up to 7.2% for comparable terms. - The early withdrawal penalty period is shorter for corporate FDs than for individual FDs. In accordance with RBI regulations, all Fixed Deposits must have a minimum penalty period of three months. Thus, if you withdraw your funds within the first three months, you must pay an early withdrawal penalty. Beyond that, it is up to the bank/NBFC/business to determine the length of its penalty period. The penalty period for Corporate FDs is typically shorter than for Bank FDs. For instance, in the case of SBI, you must pay a penalty if you withdraw your funds before the maturity date. In contrast, the early withdrawal penalty period for Corporate Fixed Deposits is only three months. Now that you know the benefits, let's examine the concern people have regarding the safety of corporate FDs. - Do corporate FDs entail a greater risk? When investing in corporate FDs, many individuals are concerned that, because these deposits are unsecured, they may lose money if the company goes bankrupt. It is essential to note that all NBFCs/companies that wish to collect deposits must adhere to the RBI/Ministry of Corporate Affairs (MCA)'s stringent regulations and guidelines. Therefore, although there are over 10,000 NBFCs in India, only a handful can accept public deposits. When it comes to placing money into corporate Fixed Deposits, these precautions ensure minimal risk to investors. - Let's examine these rules and regulations in greater depth. Which organizations/NBFCs can accept deposits? When allowing NBFCs to collect deposits from the general public, the RBI is extremely cautious. First, more than registration with the RBI as an NBFC is required, they must also have a valid licence to accept deposits. Then, the company's managed financial assets must be at least Rs 5,000 crore. In addition to these rules, NBFCs must adhere to a few other regulations when accepting deposits from the general public. Here are the results: The RBI regulations that NBFCs must adhere to when launching Fixed Deposits - The minimum term for Fixed Deposits is one year, and the maximum is five years. - The total amount of deposits an NBFC can accept is subject to a permissible cap, which varies among NBFCs. - The interest rate for Fixed Deposits can be, at most, the rate specified by the RBI, which is periodically revised. - Every pertinent detail regarding the Fixed Deposit must be disclosed to the RBI. They cannot offer the depositor any additional benefits or rewards. - In the meantime, housing finance companies with specific permits or licences to collect deposits from the Ministry of Corporate Affairs (MCA) can only take deposits from the general public up to a certain limit. Collecting deposits from the general public is a federal offence without the required RBI or MCA licence. - But there's more. NBFCs and companies must maintain a minimum credit rating to accept deposits. Rating agencies such as CRISIL and ICRA assign ratings to businesses that can accept public deposits. These agencies evaluate the company's track record, whether the interest rate and repayment schedules are disclosed to investors when accepting deposits, etc. The companies are assigned ratings, such as AAA, AA, BBB, etc., based on their performance on each criterion. The highest rating, AAA, indicates a company has a strong balance sheet. The NBFC/companies must maintain a minimum BBB rating to accept public deposits. These measures by the RBI and MCA guarantee the security of your investments in corporate Fixed Deposits. Conclusion Therefore, if you have an objective that must be accomplished within one to five years, you should invest in a corporate Fixed Deposit. It offers the security of a fixed-income instrument and a higher rate of return than bank FDs.