3. History and Growth of NBFC
NBFC stands for Non-Banking Financial Company. In India, NBFCs are financial
institutions that are engaged in providing various types of financial services, such as
loans and advances, asset financing, investments, and other similar activities, but are
not considered as full-fledged banks and do not hold a banking license. They are
regulated by the Reserve Bank of India (RBI) under the Reserve Bank of India Act,
1934.
The history of NBFCs in India dates back to the 1960s when they were established to cater to
the financial needs of small and medium-sized enterprises (SMEs), rural areas, and other
underserved segments of the economy. Over the years, the role and significance of NBFCs in
India's financial system have grown significantly, and they have become an important source
of credit for various sectors of the economy.
4. History and Growth of NBFC
1960s-1980s: During this period, NBFCs in India were primarily focused on providing
credit to small and medium-sized enterprises (SMEs), rural areas, and other
underserved segments of the economy. They were mostly private sector entities and
were subject to limited regulation.
1990s: In the 1990s, the Indian economy underwent liberalization and deregulation,
which led to the growth of NBFCs in India. Many new NBFCs were established during
this period, and they started offering a wide range of financial services, including
consumer finance, housing finance, leasing, and factoring.
1997: The RBI introduced comprehensive regulations for NBFCs in India under the
Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank)
Directions, 1997. These regulations aimed at bringing transparency, stability, and
prudential norms to the operations of NBFCs.
5. History and Growth of NBFC
2006: The RBI introduced a new set of regulations called the Non-Banking Financial
Company - Systemically Important Non-Deposit taking Company and Deposit taking
Company (Reserve Bank) Directions, 2006. These regulations classified NBFCs into
two categories: Systemically Important Non-Deposit taking NBFCs (NBFCs-ND-SI) and
Deposit taking NBFCs (NBFCs-D).
2014: The RBI introduced a new regulatory framework for NBFCs called the Non-
Banking Financial Company - Non-Systemically Important Core Investment Company
(Reserve Bank) Directions, 2014. These regulations aimed at regulating the activities of
NBFCs that are engaged in core investment activities and do not accept public
deposits.
2019: The RBI introduced further regulatory reforms for NBFCs, including enhanced
prudential norms, liquidity management framework, and corporate governance
standards, to strengthen the stability and resilience of the NBFC sector.
6. Role of NBFC in the financial system
•NBFCs act as a supplement to banks by providing infrastructure to distribute excess
resources to individuals and companies with deficits.
•NBFCs also serve the additional purpose of introducing competition in financial
services.
•Unlike banks who may offer a packaged deal on a set of financial services, NBFCs
offer customized services to suit the specific needs of clients NBFCs specializing in
one particular sector develop an informational advantage.
•From loans and credit facilities to private education funding and retirement planning,
from trading in money markets to underwriting stocks and shares, and Term Finance
Certificates, NBFCs offer almost all banking services. They provide wealth
management services like managing stocks and shares portfolios, discounting
services like discounting of instruments and give advice on merger and acquisition
activities.
7. Role of NBFC in the financial system
•The number of NBFCs has increased greatly in the last several years due to venture
capital companies, retail and industrial companies have entered the lending
business. NBFCs also often support property investments in property besides
preparing feasibility, market or industry studies for companies.
•NBFCs are usually not allowed to take deposits from the general public and have to
find options for funding their operations.
•NBFCs do not provide cheque books nor do they provide a saving account and
current account. They are only authorized to takes fixed deposit or time deposits.
8. Importance of NBFCs: How NBFCs are
Changing the Indian Financial Market
Industry Growth
The NBFC sector has had a tremendous growth graph during the past ten years. The
sector has witnessed a rise in the Compound Annual Growth rate, and many NBFCs
have taken the lead and grown faster than many banking institutions in India.
The Return on Assets (RoA) of the NBFC sector has been on the rising side as compared
to the Indian banking institutions. This is because of the lower operational costs, larger
customer base and digital presence of the NBFC players.
9. Importance of NBFCs: How NBFCs are
Changing the Indian Financial Market
Importance of NBFCs in Promoting Inclusive Growth
NBFCs in Indiaare playing a critical role in the development of the country by addressing the
diverse financial needs of underserved customers who did not have access to banking
services. Also, NBFCs are playing the leading role in providing more approachable and inclusive
financial services to Micro, Small and Medium Enterprises (MSMEs) in accordance with their
entrepreneurial requirements.
NBFCs are playing a critical role in inviting more businesses and individuals from the low-
income hierarchy to contribute to the development of the India economy. They are doing so by
providing pushing more wealth creation, credit and financial independence in rural regions.
They are also working in accordance with the Indian government’s initiative of financial
inclusion and supporting financially weaker sections of the society.
10. Importance of NBFCs: How NBFCs are
Changing the Indian Financial Market
Infrastructure Lending
NBFCs are playing a centric role in the Indian economic growth by lending financial
assistance to infrastructure projects. These projects play a key role in the growth of a
developing country like India. These projects usually involve a large amount of funds,
and the ROI is received over a long period of time. This makes infrastructure project less
attractive and riskier, making banking institutions sceptical about investing in them.
However, NBFCs are contributing to infrastructure lending through their robust portfolio
assessment abilities and risks management planning.
11. Importance of NBFCs: How NBFCs are
Changing the Indian Financial Market
Credit to Micro, Small and Medium Enterprises – MSMEs
The Indian MSME sector has immense potential to grow and contribute to the economic growth
and promotion of financial inclusion in rural and semi-urban regions in the country. However, a
large segment of MSMEs is unable to access formal credit channels that provide safe credit
solutions to them. NBFCs extend customisable loan solutions to this vast sector, giving them the
opportunity to realise their business ideas and contribute to the country’s fiscal growth.
Contribution of NBFCs in Micro Finance
NBFC-MFIs are small finance companies which provide small-size, short term loans to businesses
and individuals. MFIs extend their financial solutions to the poorer sections in the rural regions and
bridge the gap created by the commercial banks and private money lenders. NBFC-MFIs have
emerged as growth enablers which extend financial services to the low-income generating section
of the society, thereby promoting inclusive economic growth.
12. Importance of NBFCs: How NBFCs are
Changing the Indian Financial Market
Improvement in the Standard of Living
NBFCs are allowing households and individuals to avail finer living standards for themselves
by giving them the needed financial education and freedom. Improvement in the standard of
living of the large segment of individuals can propel the economic development and further
allow entrepreneurs to grow.
Growth in the Employment Sector
Non-Banking Financial Companies (NBFCs) are contributing significantly to the increase in
employment opportunities in India. NBFCs are influencing MSMEs, self-employed
professionals and entrepreneurs to grow their business and hire more employees. NBFCs are
helping this market to achieve its full business potential, allowing them to expand their
operations and provide more employment opportunities and occupation practices.
13. Importance of NBFCs: How NBFCs are
Changing the Indian Financial Market
Supporting Their Customers
NBFCs are regulated by the RBI, which requires them to implement adequate solutions to
protect their customers. NBFCs priorities the implementation of customer protection policies
to safeguard them from any kind of deceptive, fraudulent or unfair practices.
NBFCs also provide affordable interest rates, technology-driven processes and omnichannel
connectivity to their clients to raise any kinds of queries or issues with the business for a
prompt resolution.
NBFCs are also governed by the Master Directors by the Reserve Bank of India, which makes it
mandatory for them to lay down a detailed strategic plan for risk management, audits,
disclosure of information, maintenance of liquidity, transparency of operations, technology
security, and much more.
Extent of Operations
NBFCs serve both individuals and businesses from different demographics. They serve a large
market of undeserved entities and operate mostly via digital presence. This allows them to
operate on a larger extent and serve a larger market.
14. Future of the NBFC Sector
The banking sector would always remain an integral and core component of the economy
due to the innumerable services and support they provide to the businesses and
individuals alike. Banks would remain the backbone of cash flow in the Indian economy
and continue to dominate the financial market. However, despite this importance and
criticality, the importance of NBFCs to improve the financial sector is undeniable.
NBFCs are playing an important role in the Indian economy, paving the way for a more
inclusive and safer channel of financial assistance to all equally. NBFCs have a bright
future in the Indian financial sector due to their innovative ideas, faster turnaround time in
serving their customers and more affordable and accessible solutions.
The NBFCs have become a priority sector for the RBI due to the role they play in creating a
nexus between worthy financial solutions and a humongous unserved market in India.
The importance of NBFCs is also highlighted in the fact that they have garnered the trust
of businesses and individuals quickly, with their robust operational strategies, constant
connectivity and efficient financial products. They are truly the game changers in the
financial sector of India, who are contributing immensely to the financial inclusion of our
diverse country as a whole.
15. CLASSROOM ACTIVITY
Ask each student to research in details the difference
between Banks and NBFCs and give their views
regarding the NBFC industry.
16. Conditions to Register as NBFC
There are a few requirements that the business has to meet before applying
to RBI for NBFC License.
•The business should be registered as a company under the Companies Act, 1956
or 2013.
•The minimum capital (Net Owned Fund) requirement is Rs. 2 crores.
•The principal business of the applicant should be financial activities. If the
financial flow of the business is more than 50% of the total capital asset, then
that company can get NBFC registration.
•It should have at least 1 Director from the financial field or a senior banker as a
Director.
•The CIBIL (Credit Information Bureau Limited) records should be clean.
17. What is Net Owned Fund? How to calculate the Net Owned Fund?
The Net Owned Fund of a company can be defined as the funds owned by a company after
deducting the intangible assets and reserves from its Total Owned Fund.
Net Owned Fund can be calculated using the following formula as per the definition of the Reserve
Bank of India (RBI):
18. Documents that are to be furnished for
incorporation of a NBFC
•Details about the company's management.
•Certified copy of Certificate of Incorporation
•Certified copy of Certificate of Commencement of Business
•Certified copy of updated Memorandum of Association (MoA) of the
organization
•Certified copy of updated Articles of Association (AoA) of the organisation
•Copy of the PAN card or CIN that has been issued to the organisation
•Directors' profile which has to be duly filled and signed by each director
separately
19. Documents that are to be furnished for
incorporation of a NBFC
•Certificate of experience from the non-banking financial companies at which each
director had worked and obtained experience
•The CIBIL Data applicable to the Directors of the company
•The last 2 years' financial statements of the relevant unincorporated bodies, if any.
•A Board Resolution to approve the contents of the application and its submission
process, and the authorising signatory
•A Board Resolution to announce that -
• No public deposit has been accepted by the organisation previously (mention
the time period)
• No public deposits are held by the organisation till date and no deposits will
be accepted thereafter without prior permission from the Reserve Bank of
India in writing
•A Board resolution specifying that -
• No NBFC activities are being carried on by the organisation
• The organisation has stopped all kinds of NBFC operations and will not
perform the same without receiving registration from the Reserve Bank of
India.
20. Documents that are to be furnished for
incorporation of a NBFC
•In order to formulate the 'Fair Practices Code', a Certified copy of Board resolution is required.
•A Statutory Auditors Certificate certifying -
• that the organisation is not holding any Public Deposit
• that the organisation does not hold any Public Deposit
•A Statutory Auditors Certificate which certifies that the organisation is not involved in any NBFC
operation
•A Statutory Auditors Certificate which certifies the net owned fund as on the application date
•Authorised Share Capital details
•Details of the recent patterns of the shareholding of the company along with its percentages.
•Copies of Fixed Deposit receipt & bankers certificate of no loans/debts with account balances
supporting Net Owned Funds
•The branch or bank's full postal address, credit or loan facilities, bank account and balance
details, and so on taken by the company.
•For existing companies, the last 3 years' Profit & Loss account, audited balance sheet, auditors
and directors' reports, etc. are to be submitted.
21. Documents that are to be furnished for
incorporation of a NBFC
•The next 3 years' business plan of the organisation with details such as:
• the specific direction of the business
• market segment
• income/asset pattern statement sans public deposits, cash flow
statement, and projected balance sheets
•Documentary evidence of the company's startup capital source
•IT Returns or bank statements to be submitted post self-attestation
Other than these, the applicant might also have to submit other additional
documents as required.
22. Types of NBFC Not to be Registered under
RBI:
There are certain businesses that are involved in providing financial activities but
do not need to obtain a registration with RBI. These types of entities are
regulated by other financial sector regulators, and to avoid dual regulation, they
are not required to obtain an NBFC License from RBI.
23. Types of NBFC Not to be Registered under
RBI:
•Insurance Companies: These are regulated by Insurance Regulatory and Development
Authority of India (IRDA),
•Housing Finance Companies: Being regulated by the National Housing Bank (NHB),
•Stock-Broking Companies: These are regulated by Securities and Exchange Board of
India (SEBI),
•Merchant Banking Companies: Again being regulated by SEBI,
•Mutual Funds: SEBI is the regulator,
•Venture Capital Companies: SEBI is the regulatory authority,
•Companies running Collective Investment Schemes: SEBI is the regulator,
•Chit Fund Companies: These are regulated under the Chit Fund Act and by the respective
State Governments,
•Nidhi Companies: Being regulated by the Ministry of Corporate Affairs (MCA).
24. Types of NBFC
NBFC Registration can be either Deposit Accepting or Non-Deposit Accepting
ones. If they are Non-Deposit Accepting NBFCs, ND is suffixed to their name, as in
NBFC-ND. The NBFCs with an asset size of Rs.100 Crore or more are known as
Systematically Important NBFC. The types of NBFC have been named so because
they can impact the financial stability of the country. The Non-Deposit Accepting
Systematically Important NBFCs are known as NBFC-NDSI.
25. Types of NBFC
he NBFCs can be categorised under two broad heads:
•On the nature of their activity
•On the basis of deposits
•On the nature of their activity:
• Asset Finance Company
• Loan Company
• Mortgage Guarantee Company
• Investment Company
• Core Investment Company
• Infrastructure Finance Company
• Micro Finance Company
• Housing Finance Company
26. Types of NBFC
•On the basis of deposits:
• Deposit accepting Non-Banking Financial Corporations
• Non-deposit accepting Non-Banking Financial
Corporations
Deposit accepting Non-Banking Financial Corporations (NBFCs) are financial
institutions that operate in a manner similar to banks but are not licensed to accept
demand deposits, i.e., deposits that are payable on demand by a customer.
However, NBFCs can accept time deposits, which are deposits that are kept for a
fixed term or period.
27. A fixed deposit (FD) is a secure financial instrument in which you can invest a lump sum amount. This facility
is offered by banks and Non-Banking Financial Companies (NBFCs) for a fixed tenor.
Over this period, you earn returns on your deposit at a fixed interest rate. An NBFC fixed deposit is also
known as a corporate fixed deposit, since it is essentially offered by a company or corporate entity.
Many investors consider NBFC fixed deposits as their preferred mode of investment. If you are an investor
with a low tolerance for risk, you can invest in a fixed deposit plan offered by an NBFC to earn guaranteed
returns on your investment.
On the other hand, if you have a high tolerance for risk, you can still benefit from NBFC FDs because they
make your portfolio more stable. The rates of interest on FDs offered by NBFCs are relatively higher overall
than those offered on bank FDs.
That said, NBFC FD rates vary from one company to another. NBFC FD interest rates also remain
unaffected by market changes, so you can expect guaranteed returns. You can choose to receive your
interest monthly, quarterly, half-yearly, or annually.
Or, you can even choose to reinvest the interest in the fixed deposit and get it at maturity.
28. Types of NBFC
Here are some key points about Deposit accepting NBFCs:
1.Types of deposits accepted: Deposit accepting NBFCs in India can accept only
fixed deposits and recurring deposits from individuals, corporations, and other
entities. These deposits are accepted for a fixed term or period and are subject to
regulatory guidelines issued by the RBI.
2.Minimum Credit Rating Requirement: Deposit accepting NBFCs in India are
required to maintain a minimum investment grade credit rating for accepting
deposits from the public. The credit rating is assigned by registered credit rating
agencies approved by the RBI.
3.Interest Rates: The interest rates offered on deposits by NBFCs are typically
higher than those offered by banks. However, the interest rates are subject to
regulatory caps and guidelines issued by the RBI from time to time.
29. Types of NBFC
1.Deposit Insurance: Deposits accepted by NBFCs in India are not covered by the
Deposit Insurance and Credit Guarantee Corporation (DICGC) which provides deposit
insurance up to INR 5 lakh per depositor per bank. However, some NBFCs may
choose to provide their own deposit insurance or other forms of deposit protection as
per regulatory guidelines.
2.Prudential Norms: Deposit accepting NBFCs in India are required to comply with
prudential norms and guidelines issued by the RBI, including those related to capital
adequacy, asset classification, provisioning, and other risk management measures.
3.Reporting and Disclosure Requirements: NBFCs in India are required to submit
periodic reports to the RBI and disclose certain information to depositors, including
interest rates, terms and conditions, fees and charges, and other relevant details.
4.Customer Grievance Redressal: Deposit accepting NBFCs in India are required to
have a proper grievance redressal mechanism in place to address customer
complaints and grievances in a timely and efficient manner, as per regulatory
guidelines.
5.Due Diligence by Depositors: Depositors in India are advised to exercise due
diligence before placing deposits with NBFCs, including verifying the regulatory
compliance, financial strength, track record, reputation, and credit rating of the NBFC.
30. Features and Benefits of NBFC Fixed
Deposits
Before investing in NBFC fixed deposits, understanding them is crucial. Here are a few
features for you to know:
•Guaranteed Returns
NBFC fixed deposits offer guaranteed or assured returns on your investment. This simply
means that neither your capital nor the interest earnings are affected by market volatility.
Here, you can rest assured of maximising your corpus without any stress.
•Regular Income Options
You can opt for a non-cumulative type when you invest in fixed deposits. This ensures you
receive your interest income regularly in the form of monthly, quarterly, half-yearly and
annual payouts. You may choose any option according to your requirements.
•Loan against FD facility
During financial emergencies, you can avail a loan against FD. When opting for a loan against
NBFC fixed deposit, you can get up to 90% of the total FD value. Taking a loan against FD is
affordable as you only need to pay nominal interest rates.
31. Features and Benefits of NBFC Fixed
Deposits
•Simple and quick FD renewal process
Renewing an FD is easy, and you can do it from the comfort of your home. Simply visit
the NBFC website and log in with your credentials. Then, renew your FD according to
your choice and continue enjoying the benefits of assured returns.
•Flexible Investment tenors
You can choose from a wide range of investment tenors when investing in a fixed
deposit with an NBFC. The tenor options generally range from 12 months to 60
months.
•Better Returns than Bank FDs
NBFC FD rates are typically higher than the rate of returns offered on bank fixed
deposits. With attractive NBFC fixed deposit interest rates, you can accumulate funds
over a period.
•Higher NBFC FD Rates for Senior Citizens
NBFC fixed deposits, like all FDs, offer higher NBFC FD interest rates for senior citizens.
Typically, the rate is higher by around 0.25% for seniors.
32. CLASSROOM ACTIVITY
• Ask the students to research and note down the top NBFCs
Fixed Deposits and the interest rates for 5 Yr FD- 1yr, 2yr,
3rd yr,4th,yr, 5th yr.
• Also mention the rating of the FD scheme and make a
comparative analysis on the same.
33. How are NBFC FDs Different from Bank
FDs?
While fixed deposits offered by NBFCs are
fundamentally similar to bank FDs in most ways, there
are a few points of differences between these two
categories of instruments. Let’s take a closer look at
how NBFC fixed deposits differ from bank fixed
deposits.
35. How to Choose the Best NBFC for Fixed
Deposit?
•Always compare the NBFC FD rates offered by different Non-Banking Financial
Companies to identify the instrument that offers better returns
•Always review the lender's credibility to ensure your fixed deposit is safe
•Always choose deposits that carry AAA ratings, depending on the agency that rated
them
•Before opening an FD, ensure the NBFC you choose offers a hassle-free application
process and provides good customer service
•Choose the FD tenor wisely to avoid penalty charges for premature withdrawal
•If you have a surplus amount to invest, you can split it into multiple FDs with different
tenors and earn interest for every deposit
36. Corporate Fixed Deposit
Company Fixed Deposit (corporate FD) is a term deposit which is held over fixed
period at fixed rates of interest. Company Fixed Deposits are offered by Financial
and Non-Banking financial companies (NBFCs). The maturities of various
company fixed deposits can range from a few months to a few years.
Choose from multiple company fixed deposits options varying in tenures, interest
rates and institutions to suit your investment needs. Avail stable returns and
benefit from much reduced volatility through a wide range of AAA and AA-rated
Company Fixed Deposits.
37. Features of Corporate FD
1.Eligibility: NBFC corporate deposits are typically available to corporate
entities, institutions, and businesses, and are not open to individual retail
investors. The minimum investment amount, interest rates, and other terms
and conditions may vary depending on the NBFC and the specific deposit
scheme.
2.Interest Rates: The interest rates offered on NBFC corporate deposits are
usually negotiated between the corporate entity and the NBFC, and they can
vary depending on various factors, including the creditworthiness of the NBFC,
prevailing market conditions, and the tenure of the deposit. Generally, NBFC
corporate deposits offer higher interest rates compared to traditional bank
deposits, but they also carry higher risks as they are not backed by deposit
insurance.
3.Tenure: NBFC corporate deposits typically have fixed tenures, ranging from
a few months to a few years. The corporate entity and the NBFC agree upon
the tenure at the time of making the deposit, and the deposit cannot be
withdrawn before the maturity date unless otherwise specified in the deposit
agreement.
38. Features of Corporate FD
1.Credit Risk: NBFC corporate deposits carry credit risk, as the repayment of
the principal amount and interest is dependent on the creditworthiness of the
NBFC. Corporate entities should carefully evaluate the creditworthiness and
reputation of the NBFC before investing in their corporate deposits. RBI also
regulates the acceptance of corporate deposits by NBFCs and has laid down
certain guidelines and prudential norms to mitigate risks associated with NBFC
corporate deposits.
2.Documentation: Corporate entities investing in NBFC corporate deposits are
required to complete necessary documentation, including Know Your Customer
(KYC) norms as per RBI guidelines. The exact documentation requirements
may vary depending on the NBFC and the deposit scheme.
3.Taxation: Interest earned on NBFC corporate deposits is taxable as per the
Income Tax Act, 1961, and the applicable tax rate depends on the tax slab of
the corporate entity. TDS (Tax Deducted at Source) may be applicable on the
interest earned, as per the prevailing tax laws.
39. Features of Corporate FD
1.Exit Options: NBFC corporate deposits are generally not freely transferable or
tradable, and premature withdrawal may be subject to penalties or charges as per the
terms and conditions of the deposit agreement. Corporate entities should carefully
review the deposit agreement for details on exit options, including premature
withdrawal or transferability.
2.Investor Protection: Unlike bank deposits, which are backed by deposit insurance up
to Rs. 5 lakh per depositor by the Deposit Insurance and Credit Guarantee
Corporation (DICGC) in India, NBFC corporate deposits are not covered by deposit
insurance. Corporate entities should be aware of the risks involved and conduct due
diligence before investing in NBFC corporate deposits.
3.Regulatory Framework: NBFCs accepting corporate deposits in India are regulated
by the Reserve Bank of India (RBI) under the provisions of the Reserve Bank of India
Act, 1934, and the guidelines issued by RBI from time to time. RBI has laid down
various prudential norms, including capital adequacy requirements, asset
classification, and provisioning norms, to regulate NBFCs and protect the interests of
depositors.
40. Corporate/Company Fixed Deposit: Why
You Should Invest
Corporate fixed deposits fare better than Bank FDs as they offer a significantly
higher interest rate. The interest rate difference between regular Bank FDs and
corporate fixed deposits is generally in the range of 1% to 3%. This seemingly
small difference can have a sizable impact on your corpus in the long run. You
can see this difference by using a FD return calculator using different FD interest
rates. Moreover, company fixed deposits mostly have lower lock-ins and are bit
more flexible in how the interest gets paid.
Similar to Bank FDs, a corporate fixed deposit can also be used to avail loan
facility when you require the funds in case of an emergency. The sanctioned
amount can vary from one financial institution to the other. Usually, it can go as
high as 75% of the fixed deposit amount.
41. How to Choose the Best Company Fixed Deposits?
If you are planning to opt for company fixed deposits, it is easy to choose the one that offers
the highest interest rate. However, that approach is not ideal. Here are some key factors that
can help you choose the best corporate fixed deposit:
•Company’s background:
•It is a smart choice to look into the history of the company you want to start an FD with. A
credible company with a good track record of happy customers and a long history of
profitability is a safe bet. The internet has made it easier for investors to surf through the
financial institutions’ websites and compare their options before zeroing in on the final
company.
•Repayment history:
•Recently, the FD market has become more competitive than ever before. With the lure of
high-interest rates, there have been many cases in the past where companies have
defaulted on their payments. Or, the depositors have not received their payments on time.
Look for companies with timely repayment of fixed deposits and regular interest payments.
•Credit rating:
•Popular credit rating agencies such as ICRA and CRISIL have a 14-point rating system to
determine the assumed risk levels of a company’s fixed deposit. The higher the rating, the safer
the investment. You can gauge the stability of a corporate fixed deposit with its rating and even
compare similar products to finalize your investment option.
42. Benefits of the Company/Corporate Fixed
Deposits
•The flexibility of tenure:
•Similar to Bank FDs, Corporate FDs also offer the flexibility of tenure ranging
from 12 to 60 months for which you can remain invested. So, if you are saving
for a short-term goal, you can invest for one year. If you are looking to build a
decent corpus, you can invest for five years.
•Assured returns:
•As we learned earlier, the best company FDs enjoy higher ratings from
notable credit rating agencies. Most companies offering corporate deposits
are certified with CRISIL’s FAAA/Stable rating and ICRA’s MAAA/Stable
rating. These are considered some of the highest safety ratings offered in the
industry in terms of timely payment of principal and interest. A company with a
high credit rating is likely to guarantee assured returns on your investment
regardless of market fluctuations.
•Higher interest rates:
•Compared to Bank FD rates, corporate FD rates are higher.
43. Tax Implications on Corporate Deposits
Interest earned on corporate deposits is taxable as per the
income tax bracket you fall under. This means, if you fall under
the 30% tax bracket, you pay 30% tax on interest earned in
corporate deposits. According to the Income Tax Act, if the
interest earned in a financial year from a corporate FD exceeds
Rs.5,000, TDS will be deducted. You can avoid paying TDS by
submitting Form 15G (or Form 15H in the case of senior
citizens) to the bank or non-banking financial institution.
