NEWS & ADVICE : FIXED DEPOSITS
Corporates slash their FD rates
By Neelima Shankar
Feb 23, 2009
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The corporate FDs floated in the market see a fall in the interest rates as credit flow to the companies rise. With declining bank rates and enhanced lines of credit, corporates are prompted to slash the interest rates of their fixed deposits.

Fixed deposits rates of the schemes launched by companies including Mahindra & Mahindra, HDFC, ICICI, Tamil Nadu Power Finance, Sidbi and PNB Housing have been brought down by 50 to 100 basis points to the range between 8% and 10%.

Earlier in the second half of 2008 and early 2009, these corporate FDs were offering a return up to 11% to13%. Investors were attracted towards these FDs because majority of the lenders in the market withdrew from the market and moreover these companies were offering high interest rates as they consider these FDs to be an easy route to raise funds.

Haribhakti Group, CEO, Shailesh Haribhakti said, "Those times were different. Getting credit had become very difficult and companies were left with no option but to approach small investors. Things have changed now; the liquidity situation has improved. Banks and other financial services institutions are more amenable to lend money now."

At the same time the reference rates of the banks have come down drastically in the past six months. Bajaj Capital senior Vice-President, Surajit Mishra said, "Most companies link their coupon rates to the rate set by RBI. Rated issuers (companies) dictate terms now because as much as they need funds, investors too need a secure (and comparatively better yielding) asset class to park their money."

However there are still some of the companies that have not cut the interest rates. FD scheme offered by the Tata Motors is still floating at the rates between 10% and 12.8%. Since December 1st this scheme has collected to around Rs 1,200 crore from the public. Similarly Exim Bank has kept its FD rates untouched at 10%.

Investors are lured to invest in these instruments as interest rates are high. Companies have to offer high interest in order to raise bulk deposits. Besides, upfront cash rebate is another factor that makes corporate FDs different from bank FDs. Typically corporate FDs are designed to target conventional savers, retirees and pensioners.

Bonanza Portfolio distribution head Rakesh Goyal said, "Contrary to the trend, a few companies in manufacturing and realty sectors have raised interest rates by 25-50 bps to attract investors."

"These companies are desperate to raise funds; being financially weak and on the verge of default, they have no other sources to raise money. Such companies approach small investors, offering higher interest rates. They are even ready to hand-out 4-5% as brokerage charges, taking the total cost of borrowing to around 16-17%. Investors should be careful about investing in such companies," Mr Goyal added.

 


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