Bank Deposits compared: Corporate vs Bank
**Investing in Corporate Fixed Deposits: A Guide to Balancing Risk and Reward**
For investors seeking higher returns, corporate fixed deposits (FDs) can be an attractive option. However, it is essential to understand the key differences between corporate and bank FDs, particularly the increased risks associated with the former.
**Key Risks of Corporate FDs vs Bank FDs**
| Risk Aspect | Corporate FDs | Bank FDs | |-----------------------|-----------------------------------------------|----------------------------------| | **Issuer & Regulation**| Issued by corporates including NBFCs, under Companies Act, 1956 (less stringent regulations) | Issued by banks, regulated by RBI (stricter regulations) | | **Safety & Credit Risk**| Generally considered less safe due to higher credit/default risk; risk depends on the company's financial health and credit rating | Safer due to stronger regulatory oversight and government backing | | **Insurance Coverage** | Not covered by Deposit Insurance and Credit Guarantee Corporation (DICGC); no insurance on principal or interest | Covered by DICGC up to ₹5 lakh per depositor per bank, protecting principal and interest | | **Liquidity & Premature Withdrawal**| Less liquid with possible penalties; premature withdrawal might be more restricted | More liquid with easier access and typically lower penalties for early withdrawal | | **Interest Rates** | Offer higher interest rates (usually 1-3% more than bank FDs) to compensate for higher risk | Lower but more stable interest rates | | **Investment Minimum** | Generally higher minimum investment amounts (₹25,000 or more) | Can be very low (as low as ₹1,000) | | **Loan Against FD** | Generally not allowed | Possible to avail loan against FD, usually up to 90% of FD value |
**Summary of Risk Differences:**
- **Credit/default risk is the primary concern with corporate FDs** because these deposits are unsecured loans to the company, and if the company faces financial trouble, investors risk partial or total loss of principal. Corporate FDs depend heavily on the company's credit rating and financial strength, which investors must carefully evaluate[1][2][3].
- **Bank FDs carry lower credit risk**, partly mitigated by the DICGC insurance scheme that guarantees deposits up to ₹5 lakh, offering a safety net absent in corporate FDs[1][2].
- **Liquidity risk is higher for corporate FDs** as premature withdrawal may not be as flexible and can incur penalties, while bank FDs usually provide easier access and the possibility to take loans against the deposited amount[1].
- **Higher returns offered by corporate FDs compensate for these risks**, but investors should balance the potential reward against the increased likelihood of default or lower liquidity[1][3].
In conclusion, corporate fixed deposits can be attractive for investors seeking higher returns but come with significant **credit risk, lack of insurance protection, and reduced liquidity** compared to bank FDs, which are safer due to regulatory oversight and deposit insurance[1][2][3]. Therefore, investors must conduct thorough due diligence, particularly reviewing the issuing company's credit ratings before investing in corporate FDs.
For example, SBI imposes an early withdrawal penalty at any time before the maturity period, while ETMONEY's penalty period for early withdrawal is only three months. It's also worth noting that corporate FDs offer higher interest rates than those offered by SBI for FDs of various durations.
Rating agencies like CRISIL and ICRA give ratings to companies that can collect deposits from the public based on their track record, whether the interest rate and the repayment schedules are revealed to the investors, etc. Depending on how strong they are on each criterion, the companies are given ratings like AAA, AA, BBB, and so on. AAA is the highest rating and indicates the company has a solid balance sheet.
The interest rate for a corporate FD varies according to the tenure, with higher tenures resulting in higher interest rates. Corporate Fixed Deposits are deposits collected by companies and NBFCs for a fixed tenure at a prescribed interest rate.
To minimize the risk of default, one should stick to AAA-rated corporate FDs. Senior citizens often receive a higher interest rate for corporate FDs compared to non-senior citizens. Investing in a corporate FD provides the protection of a fixed-income instrument and a higher return than bank FDs for goals that need to be achieved within 1 to 5 years.
The RBI has certain guidelines for NBFCs to accept deposits from the public, such as having a minimum tenure of one year and a maximum of five years for Fixed Deposits, maintaining a minimum credit rating, and disclosing all relevant information to the RBI. NBFCs/companies have to maintain a minimum BBB rating to collect deposits from the public.
A comparison table is available to understand the difference in interest rates between corporate Fixed Deposits and bank Fixed Deposits. It is crucial for investors to weigh the risks and rewards before making an investment decision, ensuring they make informed choices that align with their financial goals and risk tolerance.
[1] MCA (Ministry of Corporate Affairs) regulations [2] RBI (Reserve Bank of India) guidelines [3] Credit rating agencies CRISIL and ICRA ratings
1.For those interested in personal-finance and investing, it's imperative to acknowledge the increased risks associated with corporate fixed deposits (FDs), particularly the credit risk, lack of insurance protection, and reduced liquidity compared to bank FDs.
- When weighing options in personal-finance and investing, investors should consider the higher interest rates offered by corporate FDs as part of the trade-off for the increased risks, and conduct thorough due diligence, such as reviewing the issuing company's credit ratings, before deciding to invest in corporate FDs.
