The story behind attractive FD rates

Non-banking financial companies are offering appealing rates to raise deposits, raising concerns about sustainability, pressure on margins

Salil Panchal
Published: Aug 13, 2019 11:13:32 AM IST
Updated: Aug 13, 2019 05:17:39 PM IST

Life is not a template and neither is mine. Like several who have worked as journalists, I am a generalist in my over two decade experience across print, global news wires and dotcom firms. But there has been one underlying theme in each phase; life gave me the chance to observe and tell a story -- from early days tracking a securities scam to terror attacks and some of India's most significant court trials. Besides writing, I have jumped fences to become an entrepreneur, as an investment advisor -- and also taught the finer aspects of business journalism to young minds. At Forbes India, I also keep an eye on some of its proprietary specials like the Rich list, GenNext and Celebrity lists. An alumnus of Xavier Institute of Communications and H.R College of Commerce and Economics in Mumbai, I have worked for organisations such as Agence France-Presse, Business Standard, The Financial Express and The Times of India prior to this.

g_119755_fd_280x210.jpgImage: Shutterstock

 At a time when policy rates are softening, non-banking financial companies (NBFCs) are offering attractive rates to raise deposits. A fixed deposit (FD) from Mahindra Finance for a tenure of 33 to 40 months offers a return of 9 percent while Bajaj Finance gives up to 8.6 percent interest for new customers and 8.95 percent for senior citizens. Weakening stock market returns are forcing investors to eye sizeable returns through debt instruments such as FDs, besides investing in gold. This raises concerns about whether NBFCs will be able to maintain their margins, and the rates at which they will lend in the future.

“Our cost of funds has remained steady at 8.5 percent. As long as our contribution of deposits is within 25 percent of our total borrowings, we do not foresee any material impact on our overall cost of funds in the short and medium term,” says Rajeev Jain, managing director of Bajaj Finance.
“Our ALM management and strong liquidity position has ensured our strong growth momentum. We have a diversified borrowing mix between banks/ money markets/ deposits at 37 percent/ 50 percent/ 13 percent respectively. In the current scenario the liquidity event has clearly differentiated between good and bad credit,” Jain says.

Bajaj Finance’s net interest margins were around 12 percent in Q1FY20 and 9.8 percent for FY19. Bajaj Finance’s overall franchise stands at 36.94 million in Q1FY20, a growth of 31 percent year-on-year. The NBFC added 2.46 million new customers in the three months to June.

“The margins that most NBFCs commanded in previous quarters are unlikely to be met,” says an analyst with a global equity research firm.

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For Bajaj Finance or Mahindra Finance too there could be some pressure on their margins in future quarters, though it is possible that these firms will be able to lend at rates of 12-13 percent.

The main rationale that these NBFCs are offering such attractive rates is for balance sheet expansion, which would help them to cover for fixed costs or maintain satisfactory capital adequacy to meet for instances of a possible default or for higher provisioning. There continues to be a very real concern in retail lending at this stage.

(This story appears in the 30 August, 2019 issue of Forbes India. You can buy our tablet version from Magzter.com. To visit our Archives, click here.)

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