Fixed-income investors with an appetite for risk can consider parking a portion of their surplus in the Non-Convertible Debentures (NCDs) being offered by L&T Finance.

L&T Finance is offering secured, redeemable NCDs for a tenure of 37-120 months. The interest rates for retail investors vary from 8.89 per cent to 9.35 per cent depending on the tenure as well as the mode of interest payment. While the 37-month NCD has a cumulative interest option, the 60- and 120-month NCDs offer annual and monthly payouts (see table).




The offer is rated AAA by ICRA, CARE and India Ratings, denoting the highest degree of safety regarding timely servicing of financial obligations and the lowest credit risk. The minimum subscription across all series is ₹10,000 (10 NCDs of face value of ₹1,000 each). The offer opens on March 6.

Investors can consider the three-year cumulative option that offers 9.1 per cent. Since interest rates have begun their descent and are expected to be benign in the near to medium term, a three-year time-frame will enable investors the opportunity to lock into higher rates now. While an interest pay-out option is also available for the three-year NCD, it provides only an annual pay-out and may not make much sense for investors looking for regular income.

Although the five- (60 months) and 10-year (120 months) NCDs offer higher interest rates of 9.25 and 9.35 per cent, the attraction dims a bit for two reasons. One, for investors who don’t need regular income, it does not offer a cumulative interest option, thus denying them the power of compounding. Besides, a three-year tenure is ideal to scout for better reinvestment opportunities if the rate cycle changes by then.

The 9.1 per cent offered by the NCD is superior to comparable NBFC deposits. AAA rated NBFCs such as Bajaj Finance, LIC Housing Finance, PNB Housing Finance and M&M Financial Services offer between 8.25 and 8.8 per cent for a three-year term. Private and public sector bank interest rates for three-year deposits stand at 6.5-8 per cent at present. Some small finance banks such as Fincare, Jana and Suryoday offer a close 9 per cent returns on three-year deposits. Thus, this NCD will be a good diversifier to your fixed-income portfolio.

The NCDs will be listed on the BSE and the NSE. Hence, you can sell it in the stock exchange before the end of the tenure. However, liquidity may be low. The interest income on the NCD will be taxable at slab rates, while the sale of the NCD in the stock market will attract long/short-term capital gains tax.

About the company

L&T Finance scores reasonably well on financial parameters. The October-December quarter saw its assets under management increase 22 per cent year-on-year to ₹94,711 crore. With the company focussing more on lower-risk retail lending, retail loans (rural and housing) at the end of the December 2018 quarter constituted 50 per cent of the total, compared with 41 per cent a year ago. Its gross NPAs have come down to 6.74 per cent from 10.4 per cent a year ago, while net NPAs have reduced to 2.64 per cent from 4.74 per cent. It is well-placed on the liquidity front, too.