- Date : 23/08/2020
- Read: 4 mins
FDs from banks vs FDs from NBFCs; attractive rates of interest compared to bank deposits, why are they higher, should you invest in NBFCs in today’s times.
Fixed Deposits (FDs) are financial instruments that are issued by banks or non-banking financial companies (NBFCs). They are issued for a stipulated return over a fixed duration. Generally, the interest rates offered by NBFCs tend to be higher than those offered by banks.
For years, FDs have been a safe haven as they are an easy way to keep your savings secure. This is especially so in the midst of fluctuating markets, where there is no certainty of returns. Moreover, FDs are one of the best investment options to meet short- and medium-term financial goals.
How do banks and NBFCs differ in this regard?
FDs from NBFCs are issued by private companies in order to raise finances. These companies issue investors a deposit certificate and promise returns at a certain rate of interest. One can choose between FDs offered by banks and those offered by NBFCs.
Does it boil down to more than just interest rates? Let’s attempt to demystify the differences.
- Generally, bank FDs offer lower interest rates than NBFCs. This is mainly due to the ‘credit risk’ associated with NBFCs. Credit risk is the chance of the company declaring bankruptcy or suffering losses. In such a scenario, you could lose your principal as well as interest payments.
- Safety of FDs offered by NBFCs is attested for by reputable agencies. FDs of banks are not rated by such agencies. Ratings are given by agencies like CRISIL, CARE, ICRA, Brickwork, etc.
- FDs from NBFCs promise higher rates of interest, but bank FDs provide tax benefits. You can claim tax deductions of up to Rs 1.5 lakh under Section 80C of the Income Tax Act. This is applicable in one fiscal year on 5-year bank deposits. These deposits come with a lock-in period of 5 years so premature withdrawals and loan against these FDs are not permitted. The interest you earn is fully taxable.
- NBFCs cannot issue self-drawn cheques and demand drafts, which banks can. This is also one of the prime differences between the two.
- Last but not least is insurance. Bank FDs are insured for up to Rs 1 lakh by the Deposit Insurance and Credit Guarantee Corporation (DICGC). While NBFC FDs are not insured at all. If there is a default of Rs 1 lakh or less, DICGC does not pay the insurance amount on bank deposits. Considering this risk, NBFCs offers higher returns on deposits when compared to banks.
Related: FAQs about fixed deposits
Why do NBFCs offer a higher rate of interest?
NBFCs raise money by offering deposits. Such deposits are unsecured loans that do not guarantee anything to the investors in case of a default. Because of such a risk, these deposits can offer higher interest rates compared to bank FDs.
It is always the higher interest rates that attract many retail investors towards company deposits. However, you can reduce the risk by checking the ratings of the NBFC. The higher the rating, the lower is the risk. It is always recommended to go with AAA or AA+ rated deposits. In addition to checking the ratings, look at offers from companies with a long track record.
What are the top NBFC FDs and their terms?
- Bajaj Finserv offers up to 7.85 % with a minimum deposit tenure of one year for a minimum deposit amount of Rs 25,000.
- Mahindra Finance offers up to 8.75% with a minimum deposit tenure of 15 months for a minimum deposit amount of Rs 5000.
- Shreeam City Union Finance offers up to 8.75% on non-cumulative deposits with a minimum deposit tenure of 12 months for a minimum deposit amount of Rs 5000.
- Kerala Transport Development Finance Corporation Ltd (KTDFC) offers up to 8.25% with a minimum deposit tenure of 1 year for a minimum deposit amount of Rs 10,000.
In times of uncertainty, people tend to gravitate towards stability and liquidity for placing their hard-earned money. Everyone wants to safeguard the worst-case scenario. NBFCs FDs offer the required safety and peace of mind. At the same time, it offers good interest rates in unsettled times. Know the different between NBFCs and banks.