A chance to lock into higher rates

Since the tightening of policy rates from March 2010, deposit rates have gone up by 250 basis points as of August this year. Even during the interim easing of rates during April 2012 and July 2013, deposit rates held up, thanks to the tight liquidity conditions.

But the party now appears to be coming to an end, with many banks, including SBI, ICICI Bank and HDFC Bank, cutting their deposit rates by 25-30 basis points in the last couple of months. With not enough avenues to deploy their funds, banks have been forced to trim their deposit rates.

If you failed to lock into high rates on bank deposits, worry not. There is yet another option available-- corporate deposits -- which are still attractive. The difference between the best rate offered by banks and AAA-rated NBFC deposits is now as wide as 60 basis points in some cases. With interest rates structurally heading down from here, it is best to lock some of your deposits into high rated deposits.

Over the last one year, the best rates offered by bank deposits have fallen sharply by 40-50 basis points. For instance, in 2013, the best rate offered by banks for one-two year deposits was 9.5 per cent, which is now down to 9.1 per cent. Similarly, two-three year deposits now offer 9.2 per cent, way below the best rate of 9.6 per cent offered by banks in 2013.

But many non-banking finance companies are still offering high interest rates on their deposits. For instance, the best rate offered for a one-year deposit is 9.5 per cent by Dewan Housing Finance —Aashray Deposit Plus, which is rated AAA by CARE, denoting the highest degree of safety regarding timely servicing of financial obligations. The company offers a special rate of 9.75 per cent for a 14-month deposit as well. Bajaj Finance, which is also rated FAAA by CRISIL, offers 9.75 per cent on a 15-month deposit.

Similarly, Dewan Housing Finance—Aashray Deposit Plus offers 9.75 per cent interest on two-year deposits. This is way higher than the best rate offered by banks. Development Credit Bank offers 9.2 per cent for two-three-year deposits. M&M Finance too, which is FAAA-rated by CRISIL, offers better rates at 9.5 per cent for 24 months.

For three-year deposits the spread between the rates offered by banks and corporate deposits widens even more. While DCB offers 9.1 per cent for deposits of over 36 months, Dewan Housing Finance offers 9.75 per cent while Bajaj Finance offers 9.65 per cent for 36-month deposits.

Depositors willing to look at lower rated deposits can lock into even higher rates. Shriram Unnati deposits, offered by Shriram Transport Finance, is rated a notch lower at FAA by CRISIL, which denotes a high degree of safety. For three-year deposits, the company offers 10.5 per cent, 1.4 percentage points higher than bank deposits.

While you will have to take on a little more risk than you would with bank fixed deposits, given that interest rates are clearly headed down, it is a good time to lock some portion of your deposits with NBFCs. Having a slightly longer investment horizon like three-five years will also minimise the reinvestment risk, reducing the risk of having to hunt for new fixed income options at higher rates in the near term.

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