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This has been a season of companies and financial institutions launching debt products, especially given the current high interest rate scenario. So, fixed maturity plans, FDs, NCDs and tax-free bonds have all been on offer over the past few months. While evaluating debt products that offer attractive interest rates, the accompanying risks need to be critically examined by investors before taking a call.
India Infoline Housing Finance (IIHF) has come up with a non-convertible debenture offer. It is a housing finance company that is registered with the National Housing Bank (NHB). Crisil as well as Care have given it AA- rating, which denotes high risk. For those in the highest income tax slab, tax-free bonds would be a better option as they give them higher yields compared with other instruments, though the tenure for such bonds is longer.
Monthly payout The coupon rate on the NCD offered by IIHF is at 11.52 per cent, with the bond offering a monthly interest payout option. This instrument is ‘secured’ in the sense that it is backed by the home loan portfolio of the IIHF. Given that the bonds carry high risk, the monthly payout options would be preferable to the cumulative option.
The NCD is for a tenure of five years and the coupon payment would be made on the 27{+t}{+h} or 28{+t}{+h} of the month starting January 2014. The minimum amount that can be invested is Rs 10,000 for retail investors.
Better yields For those in the 10 per cent and 20 per cent tax brackets, the post-tax yield in IIHF’s NCD works out to 10.7 per cent and 9.7 per cent, respectively. This yield is higher than some of the recent offerings of tax-free bonds and NCDs. But the comparison is not entirely correct, as these have far better credit ratings than IIHF.
The NCDs would be listed on both the BSE and the NSE.
Secured NCD Of course, there would be genuine concern for investors when they hear about the deteriorating asset quality banks are contending with. But home loans offered by housing finance companies, in general, do not suffer from the extent of NPAs (non-performing assets) as banks do.
A recent report by Crisil estimates that in 2012-13, NPAs on home loans stood at 2.1 per cent for banks, but 0.7 per cent for housing finance companies. Further, the projection for NPAs is 2.2 per cent for banks and 0.6 per cent for housing finance companies for 2013-14. On this parameter, the gross NPA for IIHF is quite low at 0.46 per cent. The net interest margin has generally been over 8 per cent for the company.But given the general concerns with loans of financial institutions and a slowing economy, exercising caution is a must.
venkatasubramanian.k@thehindu.co.in
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