Sound fundamentals. Sundaram Finance offers 7.3% on FDs: Should you invest?

Non-banking financial companies (NBFCs) are leading the way as far as quick rate hikes on their fixed deposits are concerned. Given that the Reserve Bank of India has increased the repo rate by 190 basis points since May this year, banks and NBFCs are responding by making deposits more lucrative. Sundaram Finance, engaged in financing commercial vehicles, four-wheelers and construction equipment, among others, has raised the interest rates on its deposits.

The company is rated AAA (stable) by ICRA and CRISIL and, therefore, there are almost no concerns pertaining to the servicing of principal and interest payments for investors.

The NBFC is offering deposits with monthly and quarterly payouts, apart from the cumulative option as well. Here’s what you must know before investing in the deposits of Sundaram Finance.

Improving metrics

As with most lenders, the Covid-19 pandemic did affect the company’s operating parameters, especially as lockdowns were announced for extended periods. However, being a relatively conservative lender with a strong track record in taking lower risks, the NBFC has come back to the growth path in recent quarters. Sundaram Home Finance and Sundaram Mutual Fund are 100 per cent subsidiaries of Sundaram Finance. Royal Sundaram General Insurance is a JV with an international partner.

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-         Assets under management (AUM) grew at a mild 2.9 per cent YoY to Rs 30,552 crore in June 2022

-         The net interest margin was healthy at 5.35 per cent

-         Gross stage 3 assets (loans overdue past 90 days) were down to 2.51 per cent in June 2022, compared to 4.25 per cent in June 2021. The net stage 3 assets declined to 1.3 per cent from 3.12 per cent earlier.

-         After a few quarters of challenges, disbursements came back strongly, with a 138 per cent growth YoY to Rs 4,895 crore.

-         Capital adequacy increased to 24.1 per cent from 23.5 per cent

-         Sundaram Home Finance’s disbursements increased by 220 per cent, while Sundaram Mutual Fund’s AUM increased by 13.4 per cent.

These metrics suggest that the company is well on the road to recovery. As the economic engine revives over the next few quarters, Sundaram Finance may benefit significantly from increased credit offtake.

What should investors do?

The company offers deposits for tenors of 12, 24 and 36 months. As mentioned earlier, there are monthly and quarterly interest payouts available. Interest rates vary from 6.46 per cent to 7.11 per cent, depending on the tenor and payout option taken.

For the cumulative option, the interest rates start from 6.65 per cent, and go up to 7.3 per cent for the three-year tenor. Senior citizens will get an additional 35 basis points interest on all tenors, for both cumulative and non-cumulative options.

Investors, especially senior citizens, can consider the two and three-year cumulative options. If they require cashflows, the quarterly option can be taken. For the 36-month tenor, Sundaram Finance’s interest rates are a tad higher than those offered by HDFC. The minimum investment amount required is Rs 10,000.

All the earned interest is added to your income and taxed at the slab applicable to you. Unlike deposits from scheduled banks, NBFC FDs are not covered by DICGC’s deposit insurance. But with Sundaram Finance, that is hardly a concern given its long track record of carrying the highest credit rating and servicing deposits in a timely fashion.

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