Banks offering low interest rate on term deposits are safer than NBFCs

Before investing your surplus money in term deposits you must consider the safety front while selecting between the bank and a non-banking finance company (NBFC). The bank might offer lower interest rates while the NBFCs offer higher interest rate but from safety point of view banks are safer for investment.

According to wealth managers along with the interest rate differential, there are other factors to be looked up on such as the credit rating of the instrument, the liquidity position of the company, its balance sheet and its sector of operation before make a final choice.

Rajesh Saluja, chief executive officer of Ask wealth pointed out, “Undoubtedly, NBFCs offer higher interest on deposits as compared to banks, but banks do provide much higher safety as compared to any NBFC. A customer who is opting for an NBFC should keep in mind the credit ratings of the company. Unless the credit rating is ‘AA’ or above, a customer should resist from parking their funds in any NBFC”.

Himanshu Kohli, founder of Client Associate also agree with Saluja’s views. He said, “While, a close look at credit ratings is important, it is beneficial for customers if they park their funds in any NBFC only for a very shorter duration.”

While some of the financial planners recommends diversification of deposits. Mukesh Gupta, director Wealthcare Securities said, “Since parking in NBFCs carries a huge risk, one should not park more than 20 to 25 per cent of one’s surplus funds in NBFCs”.

In case you decide to invest with NBFCs then sector of operations should also taken into consideration. An independent financial planner pointed out, “Parking of surplus funds in NBFCs that lend to the real-estate sector can be termed as a more risky proposition compared to NBFCs providing car finance”.

Although most of the banks are offering a maximum of 7.5 per cent interest on certain maturity, whereas some of the NBFC are offering as high as 12 per cent on deposits of similar maturity.

Regarding how safe it would be to invest funds in NBFCs, LP Agarwal, chief general manager of Punjab National Bank said, “If someone is depositing in the stronger NBFCs such as Sriram Finance and Tata Finance, among others, the risk is comparatively lower. But, in general, depositing in NBFCs is risky and one should keep in mind that who is in the management team and their balance sheet, among other things.”

According to H S Saini, general manager, Corporation Bank, “Banks provide higher flexibility to customers. One can break one’s deposit in case of need. But, NBFCs generally do not allow that. Hence, until the interest rate differentials are very substantial, banks deposits are better bets even with lower interest rates”.