In the past three months, the RBI has hiked repo rates by 100 basis points (bps), suggesting a rising interest rate cycle may be on the cards. In such a scenario, investing in fixed deposits (FD) is a rational choice. However, not all banks and financial institutions have been hiking deposit rates. Most of the public sector banks are offering rates in the range of 5-5.5 per cent for one–two year period while most private sector banks are in the range of 5.5 -6 per cent. Just a few such as IDFC First Bank, Bandhan Bank , Yes Bank and Indusind bank are offering around 6.5 per cent for this tenure. However, small finance banks are offering rates in the range of 6.5-7.25 per cent for the one–two year tenure, which makes their deposit offering quite attractive. But another option to also consider is the deposits offered by non-banking finance companies or NBFCs.

The key risk, which cannot be ignored while depositing money in NBFC, is that they are not guaranteed by DICGC (Deposit Insurance and Credit Guarantee Corporation) whereas with banks, deposits up to ₹5 lakh is safeguarded by the DICGC. The deposits with NBFCs are unsecured, they neither have the DICGC guarantee and neither secured by assets such as non-convertible debentures (NCDs).

Bajaj Finance is a leading NBFC specialising in consumer loans. It has assets under management of ₹1.97 lakh crore as on March 2022. It also has exposure to rural, SME, commercial and mortgage loans. The company’s capital adequacy was 27.22 per cent as on March 31,2022, with tier-I capital at 24.75 per cent. Here we analyse Bajaj Finance’s systematic deposit plan.

Understanding the product

Bajaj Finance offers a fixed deposit (FD) product called Systematic deposit plan (SDP). This is like a systematic Investment plan (SIP) but here the installment is used to open a new Bajaj Finance FD. The product is offered at a rate of interest (RoI) of 6.2 per cent for 12-23 months and 6.95 per cent for 24-35 months and senior citizens, like with all FDs, will get an additional 0.25 per cent. The minimum deposit to be made is of ₹5,000 with monthly tenures ranging from 12-60 months.

There are two options available. One is a monthly maturity scheme, and the other is single maturity scheme. In monthly maturity scheme a fixed amount is debited from the investor’s bank account every month for a fixed period and after the deposits are made for the same number of months every month maturity proceeds are paid out to investor. In case of single maturity scheme the depositor must decide the amount of deposit per month, the tenure and number of deposits. Once all the deposits are completed, at the end of the tenure all the deposits will mature and credited to depositor.

Let us consider following situations.

Case A: Raja decides to start SDP with Bajaj Finance and starts the SDP with ₹ 5,000 for tenure of 12 months in July 2022. So, here the deposit of ₹5000 will start from July 2022 and continue June 2023 and from July 2023 onwards the deposits will start maturing every month till June 2024. This is monthly maturity scheme.

Case B: Raja decides to start SDP with Bajaj Finance and starts the SDP in July 2022 of deposit ₹ 5,000 with 12 deposits and tenure of 24 months. This arrangement is called single maturity scheme. Here Raja starts depositing ₹5,000 in July 2022 till June 2023 and in June 2024 all the deposits will mature and proceeds will be credited to Raja.

How it differs from RD?

Looking at the features of SDP, one may be tempted to compare it with recurring deposit or RD. However, both are different products.

In SDP, since each deposit is a separate FD, the rate of interest will be the applicable rate on the date of deposit. In RD, the rate is fixed throughout the tenure of the deposit. In SDP, each deposit has same tenure (in single maturity scheme the tenure of subsequent deposits is adjusted for maturity on single date) whereas an RD has fixed tenure and interest rate and for each new deposit the interest will be paid for the remaining tenure. Banks charge a penalty in the form of lowered interest rate in case of a delay or non-payment of deposit whereas no such charges are levied by Bajaj Finance for delay or non-payment. Investors can anytime cancel the bank mandate (auto debit) and stop the SDP. However it cannot be revived and to restart the SDP investor needs to make a fresh application.

Should you go for it?

In a rising interest rate scenario, SDP is a good option because with each succeeding deposit investors can lock higher rate of interest. In the past few months Bajaj Finance has hiked its FD rates once in May 2022 and once in June 2022. In May 2022, Bajaj Finance announced a 10 basis points hike for deposits of tenure 36-60 months (increased to 7.4 per cent). The interest on 12-23 month tenure saw a 45 basis points in July 2022 (increased to 6.2 per cent). The SDP option will be suitable for investors who cannot keep a regular watch on interest rates in the market and also for those investors who can spare small amounts to invest.

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