Investing in fixed deposits of state government-owned entities may seem like shooting two birds – attractive returns and solid safety – with one stone. But it may not be so.

FDs from non-banking financial companies (NBFCs) such as the Tamil Nadu Power Finance and Infrastructure Development Corp. (TN Power Finance), the Tamilnadu Transport Development Finance Corp. (TDFC) and the Kerala Transport Development Finance Corp. (KTDFC) seem to be popular with investors. As of March 2020, TN Power Finance and TDFC had public deposits worth ₹5,900 crore and ₹794 crore, respectively.

What’s good, what’s not

Both TN Power Finance and TDFC offer an attractive 7 per cent (1-year) and 7.25 per cent (2-year) p.a. on their cumulative FDs. KTDFC offers 6 per cent p.a. on its same tenure deposits.

Despite their implicit government backing, the weak financials of these NBFCs as reflected in their subpar credit ratings do not inspire much confidence. The absence of DICGC’s (Deposit Insurance and Credit Guarantee Corporation) cover for such deposits, too makes them a risky bet.

Past credit events have taught us that even the highest AAA ratings must be taken with a pinch of salt. That means, one must be even more wary of lower-rated instruments. Both the TN Power Finance and TDFC FDs are rated MA-(Stable) by ICRA. Even this rating is supported by “ownership and the expected financial support from GoTN”.

TN Power Finance : According to an ICRA report dated Apr 2021, the NBFC provides loans only to the Tamil Nadu Generation and Distribution Corp. or TANGEDCO. This exposes it to concentration risk. As per the report, while the company’s net profitability improved in FY2020 and 9M 2021 compared to FY19 thanks to lower cost of deposits, the sustainability of this will depend on how much pricing flexibility it has with TANGEDCO. TN Power Finance reported net profit of ₹505 crore on an asset base of ₹39,488 crore in FY2020. Based on the latest available numbers, the company’s CRAR (capital to risk weighted assets ratio) was around 12 per cent as of March-end 2020. This must be raised to 15 per cent by March 2022 as directed by the RBI and may require equity infusions from the government as in the past.

TDFC : Based on another ICRA report dated Nov 2020, the NBFC provides loans to state transport undertakings (STUs) and had a CRAR of 15.3 per cent as of March-end 2020. This was a significant improvement from a year ago thanks to the government’s equity infusions. However, with Covid impacting the operations of STUs, TDFC’s capital adequacy could come under pressure. TDFC reported net profit of Rs. 12 crore on an asset base of ₹9,329 crore in FY2020.

Interest payment on deposits (public and others) accounted for 75 per cent and 95 per cent of TN Power Finance’s and TDFCs’ FY2020 revenues.

We were unable to find any financial statements for KTDFC or any credit ratings for its FDs. Attempts to access its website itself were not without trouble – with access being denied due to the website apparently being infected with malware! You can, however, search for ‘KTDFC interest rates’ to gain access to the website.

Safer avenues

Deposits from NBFCs unlike those from banks (including small finance banks) do not enjoy DICGC’ insurance cover. Under this, each bank depositor is insured for a deposit amount of up to ₹5 lakh to be disbursed in a time-bound manner in case a bank gets liquidated or is put under a moratorium. While investors may draw comfort from the implicit government guarantee for state-owned NBFCs, in the absence of any formal time-bound protection, deposit refunds in case of any financial trouble may get delayed.

FDs from financially stronger NBFCs and small finance banks (SFB) can be a safer alternative. Take for example, the two-year cumulative FD from Bajaj Finance that offers 6.10 per cent p.a. The deposits enjoy the highest rating - CRISIL’s FAAA/Stable and ICRA’s MAAA (stable). An NBFC with a diversified loan book, Bajaj Finance’s CRAR of 27.7 per cent is well above the mandated 15 per cent, providing adequate buffer against any future bad loans. Another option can be Equitas SFB’s 2 years 1 day deposit that offers 6 per cent p.a. The SFB has a well-diversified loan portfolio and at a CRAR of 22.2 per cent has a strong capital base.