Corporates cut FD rates as credit flow looks up

A combination of declining bank rates and improving credit lines is prompting many companies to reduce interest rates on public fixed deposit (FD) schemes floated some months ago when money supply was tight.

Fixed deposit schemes launched by companies such as Mahindra & Mahindra, HDFC, ICICI, Tamil Nadu Power Finance, Sidbi and PNB Housing, amongst others, now offer interest rates between 8% and 10%, down 50-100 basis points over the rates offered six months ago.

Corporate fixed deposit schemes became popular with investors for a brief while towards the second half of 2008 and early-2009, as these schemes offered 11-13% returns. Companies found corporate fixed deposits an easy way to raise money (to meet working capital needs) when banks and other institutional lenders suddenly tightened their purse strings late last year. Around 40 companies had launched corporate fixed-deposit schemes during the second half of 2008, each competing with he other to borrow capital from retail investors.

“Those times were different. Getting credit had become very difficult and companies were left with no option but to approach small investors. Things have changed now; the liquidity situation has improved. Banks and other financial services institutions are more amenable to lend money now,” said Haribhakti Group managing CEO Shailesh Haribhakti.

Another reason for reduced pay-out is the fact that reference rates (bank rates) have come down significantly over the past six months. “Most companies link their coupon rates to the rate set by RBI. Rated issuers (companies) dictate terms now because as much as they need funds, investors too need a secure (and comparatively better yielding) asset class to park their money,” said Bajaj Capital senior vice-president Surajit Mishra.

Still, not all issuers have reduced interest rate on their public borrowings. Tata Motors FD scheme — which has collected close to Rs 1,200 crore (since December 1), according to market sources — still offers fixed deposit interest rates between 10% and 12.8% under various options. Likewise, Exim Bank has also kept its FD rates unchanged at 10%. According to experts, whenever companies want to raise bulk deposits, they tend to keep interest rates higher. Corporate FD schemes typically target conventional savers, retirees and pensioners. Upfront cash rebate is one differentiating aspect (from bank FDs) that makes company deposit schemes click among investors.

“Contrary to the trend, a few companies in manufacturing and realty sectors have raised interest rates by 25-50 bps to attract investors,” says Bonanza Portfolio distribution head Rakesh Goyal.

These companies are desperate to raise funds; being financially weak and on the verge of default, they have no other sources to raise money. Such companies approach small investors, offering higher interest rates. They are even ready to hand-out 4-5% as brokerage charges, taking the total cost of borrowing to around 16-17%. Investors should be careful about investing in such companies,” Mr Goyal added.

Source: Economictimes