HDFC Ltd, the pioneer in India’s home-financing industry, has lowered rates by 11 basis points in the one-to-five-year period, now offering a maximum of 7.50% on its deposits. ICICI Home Finance has reduced rates by 20-50 basis points across tenures and it now offers a maximum of 7.7%, with the steepest cut of 50 basis points applicable for deposits maturing in five years.
Similarly, Bajaj Finance has lowered deposit rates by 15-40 basis points and the maximum it pays is 8.35%. PNB Housing Finance and Shriram Transport Finance are likely to reduce rates by 20-25 basis points, beginning early January.
“Despite the cut in rates, these deposits pay 125-250 basis points higher than what a bank pays,” said Anup Bhaiya, MD and CEO, Money Honey Financial Services, a Mumbai-based financial products distributor. For instance, a State Bank of India deposit pays 6.25%, while a Bajaj Finance FD pays 8.35%, yielding 210 basis points more.
Bhaiya said that this spread is at a historical high, compared with the usual spread of 75-150 basis points between bank FDs and AAA-rated FDs.
Given that interest rates could head southward in the future, distributors believe it is a good time for investors to park money in fixed deposits for a three-five-year tenure.
“Company fixed deposits work very well for those whose income is not subject to tax or in the marginal tax bracket,” said Mohit Mittal, vice-president, investments, Bajaj Capital.
As interest income from fixed deposits is fully taxable for the investor, it works well for those in the marginal tax bracket.
Many retail investors continue to prefer fixed deposits over other debt products after the credit crisis and defaults by IL&FS.
In a fixed deposit, interest income and returns are predictable and investors can get monthly or quarterly cash flows. In a debt mutual fund, by contrast, returns are not guaranteed.