Portfolio

TN Power Finance fixed deposit: High rates but tread with caution

Vivek Ananth | Updated on August 12, 2020 Published on August 12, 2020

Relatively lower credit ratings despite State government guarantee make the product suitable only for those with some risk appetite

BL Research Bureau

Interest rates on deposits and other fixed income instruments have been falling over the past year. This has put many conservative investors in a quandary because they often rely on interest income from fixed income instruments for their regular expenses, or to earn some extra income.

Many such investors are now looking for fixed income products that provide a higher return. One such product is the fixed deposit (FD) of Tamil Nadu Power Finance and Infrastructure Development Corporation. Investors can invest in this FD online through the company’s website.

Even though TN Power Finance’s FD offers rates as high as 8.25-8.57 per cent per annum, (higher than most other offerings in the market), conservative investors, who attach high priority to safety, can avoid it. The product is more suitable for investors with a higher risk appetite. Here’s why.

Options, tenures, rates

This FD offers two payment options — regular and cumulative. In the regular interest payment option, an investor can opt for interest payments every month, quarter or year. The tenures for which you can invest in the regular interest payment scheme are 24 months, 36 months, 48 months, and 60 months. There is no monthly or annual interest payment option in the 24-month tenure.

In the monthly interest payment option, the interest rate for tenure of 36 months to 60 months is 8.25 per cent. For the quarterly interest payment option, the interest rate for the 24-month tenure is 7.8 per cent, and for 36 to 60 months, 8.31 per cent. For the annual interest payment option, the interest rate is 8.57 per cent for tenure of 36 months to 60 months.

In the regular payment option, senior citizens (above 58 years of age) get 25-54 basis points extra interest rate, depending on the tenure of the deposit.

In the cumulative option, the tenures available are 12 months, 24 months, 36 months, 48 months, and 60 months. At the end of the tenure, the principal, along with interest, will be returned to the investor. The rate of interest for the cumulative options are 7.5 per cent for the 12-month tenure, 7.75 per cent for 24 months, and 8.25 per cent for 36 months to 60 months. Senior citizens get an extra 25-50 basis points interest, depending on the tenure.

 

The interest is compounded monthly in the cumulative option, which increases the effective annual yield in TN Power Finance’s FDs. The effective annual yields under the cumulative option with terms of 12 months, 24 months, 36 months and 60 months are 7.76 per cent, 8.03 per cent and 8.57 per cent, respectively. The company, on its website, shows a still higher effective annual yield but that is calculated on simple interest basis; yield should be calculated on compound interest basis.

In both the regular and cumulative schemes, the minimum deposit amount is ₹25,000, with incremental amounts in multiples of ₹1,000. Tax on interest will be deducted at source, if applicable.

Lower rating despite guarantee

Higher returns (rates) generally come with higher risk. The FDs of TN Power Finance also carry relatively higher risk compared with other choices that offer lower rates. This is reflected in ICRA’s rating of the deposit ‘MA-’ with a stable outlook issued in August 2019, valid till August 18, 2020. This is two notches below ICRA’s highest possible credit rating of MAAA for FDs.

The lower rating is despite TN Power Finance being fully owned by the Tamil Nadu government. This means that the debt of TN Power Finance, including its FDs, comes with the State government’s guarantee.

ICRA’s rationale for the relatively low rating is that the FD carries average credit risk. The rating agency notes that the capital profile of TN Power Finance is weak, despite capital infusions by the Tamil Nadu state government. TN Power Finance will continue to need the state government’s assistance to meet its capital needs to meet regulatory norms till financial year 2021-22, ICRA said.

Given the relatively lower credit rating on one hand and the state government guarantee on the other, the TN Power Finance FD seems suitable only for those who have the stomach for higher risk. Such investors can consider tenures of 1-3 years. Those who seek complete safety might be better off keeping away.

Concentration risk

TN Power Finance is a non-banking finance company (NBFC) that lends only to Tamil Nadu Power Generation and Distribution Company (TANGEDCO). This creates concentration risk, says ICRA.

Nearly 86 per cent of TN Power Finance’s borrowings were in the form of deposits as on March 31, 2019. Within these, deposits from the public consisted of 21 per cent of the total, while the rest came from the Tamil Nadu government and entities controlled by the state government.

This created a situation where, as of March 31, 2019, public deposits constituted 2.5 times the company’s net owned funds, against a regulatory threshold of 1.5 times net owned funds. Capital infusion by the Tamil Nadu government in the past year has helped bring this down to prescribed regulatory levels, according to ICRA.

Key features

Payout and cumulative options

Monthly, quarterly, annual payout options

Monthly compounding in cumulative option

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Published on August 12, 2020
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