Company fixed deposits are back in vogue

Companies are revisiting the retail deposit market with renewed vigour as bank funds dry up, loan rates climb higher and stock markets tumble. 

Companies are reactivating their dormant fixed deposit schemes by realigning their interest rates with the market following the footsteps of the lenders.

"In today's tight market, companies are looking to raise funds at the most optimum cost. Through FDs, they can collect a large pool of funds at a lower cost,'' said Arvind Parakh, CFO, Jindal Stainless, which recently placed advertisements in newspapers for raising funds.

The Reserve Bank of India has raised its benchmark interest rate to 8.5 per cent -- the highest in more than six years - to stem inflation, forcing the banks to raise their prime lending rate to as high as 15.5 per cent.

Bank lending rates have climbed to their highest in about a decade. India's benchmark Sensitive index (Sensex) has declined more than 30 per cent since its peak in January.

Distributors are taking more interest in fixed-income products as investors' risk appetite is low, and many conservative investors are positively inclined towards fixed-income products like FDs.

"Companies are becoming more pro-active; they have increased the interest rates, plus offering special offer for senior citizens,'' said Rajiv Bajaj, managing director, Bajaj Capital, a distributor of financial products.

For instance, companies can raise FDs for an all-inclusive cost of 12.5 per cent, including the sales commission and cost of liquidity (they need to invest a small portion of the FDs maturing this year in government securities), while banks are charging interest rates of 14 per cent.

"It's a win-win situation. Companies save 1-1.5 per cent interest costs, while depositors can earn 0.5 per cent to 0.75 per cent of the commission as pass-through upfront,'' said an expert.

Also, for companies raising debt is a better option than equity in today's market as they won't get the valuation they want. Besides, FDs offer companies free cash flow for which they don't have to offer an underlying security like in bank loans.

"It's an unsecured credit, good for meeting short-to-medium term capital requirements of a company,'' said an expert.

But investors are not flocking to distributors to buy FDs. Having burnt their fingers when many companies like Modern Industries, Morepen Laboratories and DCM defaulted on their repayments, investors are cagey.

"Banks have increased their interest rates and investors are more inclined towards them. They still don't have much faith in private companies,'' said a senior executive with a distributor.

Experts tracking the FD market, however, say that investors are more inclined towards banks because the awareness level on other fixed-income products is low. 

"If you were to factor in 11.9-per cent inflation rate, bank FDs offer negative real returns. Today, there are highly-rated debt options available with comparable safety that can offer you a 2 per cent real return,'' added Bajaj.

Corporates agree that defaults in the past by some large groups will make the job of raising fresh deposits challenging. Since then, however, the regulations have become tighter, and in case of a defaults, a warrant can be issued against a company's finance director.

Investors would wonder if this is enough to deter unscrupulous promoters from flying away with their money.