Company FDs vs. Bank FDs

There is a strong debate between whether one should invest in Corporate FDs or in Bank FDs. The low interest rates on bank FDs has prompted retail investors to look for alternatives and corporate FDs have emerged as a good option in recent times.

Corporate FDs (CFDs) like bank FDs provide guaranteed return.  In both cases one is aware of the amount that we can get at maturity and hence can make our financial plans accordingly. Also both corporate and bank FDs offer higher interest rates to senior citizens. Both the FDs provide flexibility in terms of tenure and investment amount.  CFDs however differ from Bank FDs in the following aspects.

Comparison of Corporate FDs and Bank FDs

1. Interest Rates: Corporate FDs offer higher interest rates as compared to bank FDs. The following tables show a comparison between the difference in interest rates of the FDs of SBI (Bank) and that of Bajaj Finance. As can be clearly seen the interest rates of the FDs of Bajaj Finance is higher for all the tenures. The interest rates for the senior citizens is also higher for the CFDs. Consider this. For a tenure of 1-2 years the interest rate offered by SBI on its FD is 4.9% while Bajaj Capital offers 5.94-6.10% interest on its FD for the same tenure.

 

SBI Bank FD Rate

Tenure	General Public FD Rate	Senior Citizens FD Rate
211 days – upto 1 yr	4.40%	4.90%
1 yr – upto 2 yrs	4.90%	5.40%
2 yrs – upto 3 yrs	5.10%	5.60%
3 yrs – upto 5 yrs	5.30%	5.80%

Bajaj Finance Fixed Deposit Rates 2020

Tenure (Months)	FD interest rates	Senior Citizen FD interest rates
12 – 23	5.94% – 6.10%	6.17% – 6.35%
24 – 35	6.13% – 6.30%	6.36% – 6.55%
36 – 60	6.41% – 6.60%	6.64% – 6.85%

Risks associated with Bank FDs and Corporate FDs

The Reserve Bank of India secures bank deposits upto Rs. 1 lakh, so even if the bank goes bankrupt or defaults in its payment investors will get their money.

RBI has issued guidelines which the NBFCs have to follow to accept deposits from the public. However the repayment of deposits by NBFCs is not guaranteed by RBI. Corporate FDs are therefore unsecured investments, i.e., if the company defaults the investor cannot sell the documents to recover the capital, and therefore carry relatively higher risk than bank FDs.

In fact corporate FDs are the riskiest of all fixed income products because the default risk, i.e., the risk of losing the principal is the highest in these products. In order to compensate for the risk, companies offer high interest rates but depositors must be wary and not take up unwarranted risk. A thorough research of the company- its background, past financial performance, customer service, details of the board of directors, it promoters etc- must be done before investing in its fixed deposits.

There have been numerous cases where companies have defaulted and not paid back the depositors. Hence utmost diligence is warranted.

3. Premature Withdrawal

The Reserve Bank of India stipulates that all fixed deposits (both bank and company FDs) must have a minimum lock-in period of 3 months which means investors can withdraw funds only after 3 months. Penalties for withdrawals after 3 months varies from company to company and depends on the deposit amount and the tenure. In case of premature withdrawal after 3 months, companies deduct about 2-3 percent on the interest.

Premature withdrawal of bank FD attracts about 2 percent on the interest rate accrued.

4. Taxation

In the case of bank FDs with lock-in periods of 5-10 years, there is an income tax benefit under Sec 80C of the Income Tax Act. Also the banks deducts TDS if the interest on the bank FD exceeds Rs. 10,000 in a year. CFDs, on the other hand, deduct TDS if the annual interest exceeds Rs. 5000.

Key Takeaway 
Both Corporate and Fixed Deposits have their own pitfalls and gain. It depends on what you want to get out of it. Are you investing in an FD or a Corporate FD? Consult an expert to make the right choice!