Be Cautious while investing in Corporate Fixed Deposits

Bank fixed deposits (FD) are one of the safest contemporary investment options. FDs offer a fixed rate of return for a specific lock in period. Apart from banks, corporates also offer fixed deposits on similar lines, but these FDs offer relatively higher rate of return. Corporate FDs are for a maturity period of 1 to 3 years offering as high as 12% in some cases.

However, the customers should not be lured by high interest rates as the deciding factor. Since it is not mandatory for corporates (other than NBFC and housing finance cos.) to get their FDs rated from rating agencies, the choice becomes difficult for the consumer. But there are certain thumb rules while chosing the best out of these options. Firstly, the company should be making profit and paying out dividends over the past few years; secondly, amount of taxes paid out to government is also a vital factor, since the company can not tweak much with the numbers.

Another thing to note is to do a background check on company, that is the companies promoted by big industrial houses should be preferred. Companies with promoter group who have had history of default should be avoided. Also, a lower risk free return is always better than higher doubtful returns. It is therefore advised to invest in companies of repute or companies which have been mobilizing deposits from public for a long time.

Bank of India slashes interest on single term deposit

State owned bank, Bank of India has announced a revision in its interest rates on select maturities of fixed deposits. While the bank has increased the rates on retail fixed deposits, interest rates on bulk deposits have been reduced by up to 0.50%. The new rates will be effective from September 1.

Public sector banks have been under pressure from finance ministry to reduce their bulk deposits to a maximum of 15% (including 5% limit on certificate of deposits). For single term fixed deposits exceeding Rs. 1 crore, the bank will pay 7.5% (8% presently) for 46 days to 90 days maturity. 91 days to 179 days maturity would give 8%(8.25%).

Interest on 179 days to less than one year maturity would be 8.5%(8.75%). The bank has however increased the rates on retail fixed deposits (upto Rs. 1 crore) by 1.5% on select maturities

Punjab National Bank to reduce bulk deposits

The banks are under constant pressure of finance ministry to reduce their bulk deposits. Punjab National Bank (PNB), the second largest public sector bank is also planning to reduce its bulk deposits to meet the deadline of March 31, 2013.

Bank's chairman and MD Mr. KR Kamath said that the bank would be replacing some of its bulk deposits with retail fixed deposits. According to a recent Deutsche Bank report, the PSB needs to cut on its bulk deposits by about 5-7% to meet the deadline.

Kamath further added that the bank can only reduce the base rate once the cost of funds go down. He also denied any near future possibility of bank introducing a floating rates term deposit (FRTD) like IDBI Bank. But maintaining if the conditions become favorable the bank may consider the option.

The bank inaugurated its self service branch 'Pragrati' which would offer services like ATM, cheque and cash depositing, and pass book updating machine.

IDBI Bank Floating rate fixed deposits, whats different?

Recently IDBI Bank launched a new fixed deposits scheme, Floating Rate Term Deposit (FRTD). FRTD are very common in Europe and the US, but most of the consumers in India are unaware of any such product.

Unlike a regular fixed deposit, FRTD do not have a fixed interest rate. The interest rate depends on a certain benchmark. Like in case of IDBI bank's FRTD, the benchmark is quarterly average of 364 days T-bills auctioned by RBI. The bank offers a certain rate above the benchmark rate akin to the floating rates loan which are pegged on BPLR or Base Rates.

For instance the average of T-bills comes out to be 9.8%, and the bank offers 80 basis points above the benchmark for a deposit of 2 months. In that case, the bank would offer 10.6% interest, while if the average rate comes to 9.2% the interest earned would be 10%.

Consumers can open a FRTD with IDBI Bank by depositing minimum of Rs. 10,000 adding multiples of Rs.1000 up to Rs. 1 crore. The minimum lock in period would be 1 year, upto a maximum of 10 years. The bank is initially targeting HNIs for making the product popular.

Banks contemplating rate cuts for bulk deposits

Since the ministry has asked banks to lower down the share of bulk deposits, banks are planning to reduce rates on bulk deposits with the banks. Banks have been asked to limit the share of such bulk deposits to 15 per cent of total fixed deposits which is as much as 40 per cent for some banks in current fiscal.

The step is taken in regards to manage asset-liability ratio effectively and improve profitability of banks.

S.L.Bansal, Chairman and MD, Oriental Bank of Commerce said, “Fortunately there is not too much of a credit demand. So unless a bank is very crazy about growing its balance sheet, then it will refrain from raising such deposits. Rates on bulk deposits will automatically come down.”

Banks will ask for extended time period from Union Government to achieve the target in next fiscal as it seems difficult to lower the deposits drastically in this fiscal.

1.75% hike in deposit rates – BoB

New rates on fixed deposits after the hike of 1.75 per cent has been declared by the public sector bank, Bank of Baroda

PunjabNational Bank (PNB) also hiked the rate previously while SBI lowered the rates as an impact of RBI’s monetary policy review meeting.

Now BoB would charge rate of 6.25 per cent instead of 4.5 per cent on term deposits with maturity of 46-90 days. Apart from this, interest rates for deposits of 1-3 years and 3-10 years will be 9 per cent. Interest rate of 7.75 per cent instead of 7.50 per cent will be provided on deposits of 271-365 days.

All the rates will be effective from now. It’s high time for the customers to avail the benefits of hiked rates on deposits.