Banks and finance companies are now scrambling for deposits thanks to a growing mismatch between credit and deposit growth. Loan disbursement for banks and finance companies continues to grow in double digits, largely driven by personal loans, but deposit growth has been sluggish. This has created liquidity issues for lenders and they are forced to solicit new deposits by offering higher interest on fixed deposits (FDs) and even saving accounts if the amount is high.
In the last one year, interest rates on term deposits by banks have increased by 150-200 basis points on average, according to data from the Reserve Bank of India. This is good news for savers who have been struggling with low interest on banks' fixed deposits and other such fixed-income products for many years now. The hike in deposit rates by lenders has come at a time when there is talk of a cut in interest rates by the world’s major central banks including the Reserve Bank of India (RBI). If the rate cut comes through it will force banks to cut interest on their deposits as well.
This is the right time for savers to lock in their deposits at a higher rate before they start softening later this year as many experts believe.
Non-banking finance companies (NBFCs) and urban-cooperative banks offer higher interest on deposits than banks, but they also come with higher default risk. As a thumb rule, we advise readers to stick to large NBFCs with higher credit ratings (AA+ or higher).
Here are some of the best savings options available in the market right now.
1. RBI Floating Rate Bonds (FRBs) 2023: In October 2023, the Reserve Bank of India set the annual interest rate for the Government of India Floating Rate Bond (FRBs) at 8.05 percent for the duration spanning from October 30, 2023, to April 29, 2024. It’s a floating rate instrument and the interest rate on these bonds will be reset every six months and the next reset will occur on April 20, 2024.
It is a taxable bond – interest on bonds is taxable under income tax, with a tenure of seven years, through premature redemption is allowed for senior citizens in special cases. This is a good option for long-term savers who won’t mind blocking their funds for seven years.
The bonds can be purchased from the designated branches of the State Bank of India, IDBI Bank, Axis Bank, HDFC Bank and ICICI Bank.
The RBI has now allowed individuals to apply for FRBs via its retail direct portal. The Bonds will be issued in electronic form only and credited to your demat account called Bond Ledger Account by the RBI. The bond is like a half-yearly income plan and there is no option to receive cumulative interest and principal at maturity at the end of seven years. Savers will earn interest every six months and it will be directly credited to their bank account.
2. Post office deposits: The old plain vanilla post office deposits are no more as lucrative as in the past but at the current interest rate of 6.9 percent for a one-year term, 7.5 percent for 5-year term deposits, they are still one of the best options for savers who prefer government-backed savings instruments. The post office also offers a monthly income scheme (MIS) at an interest rate of 7.4 percent per annum payable.
Investment in post office MIS can be done in multiples of Rs 1000 with a maximum investment limit of Rs 9 lakh in a single account and Rs 15 lakh in a joint account.
The post office also offers 5-year recurring deposits (RD) at an interest rate of 6.7 percent per annum compounded quarterly. The effective yield on post office deposits rises by 50-100 basis points including the cashback that you get if you invest through their authorised agents.
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3. Shriram Finance Fixed Deposit: The Chennai-based NBFC currently offers one of the best interest rates on deposits in the private sector. The company currently offers an annualised yield of 8.6 percent for a 50-month deposit. The annualised yield works out to be 7.8 percent for a one-year deposit. An investor can earn an annual interest income of Rs 431 for an investment of Rs 5000 for five years. Annual interest income will be Rs 463 in the case of women senior citizens. It is one of the oldest and biggest non-banking finance companies in the country with a credit rating of AA+ for its long-term rupee and total assets worth Rs 2.21 lakh crore at the end of September 2023.
4. M&M Financial Services FD: One of the top non-bank lenders with a major presence in rural areas and smaller towns, M&M Finance currently offers three FDs with tenures of 15, 30 and 42 months respectively. The effective annual yield on cumulative deposit varies from 7.86 percent for a 15-month deposit to 8.92 percent in the case of a 42-month FD. It is one of the best-rated NBFCs with a long-term credit rating of AAA which could be partly attributed to it being part of the large Mahindra group. It reported total assets of Rs 1.09 lakh crore at the end of September 2023.
5. Bajaj Finserv: The country's second largest non-bank retail lender through its subsidiary Bajaj Finance offers up to 8.85 percent interest on its longer-term FDs with a tenure of 42 months. The annualised yield varies from 7.45 to 7.75 percent for FDs with a tenure of 15 to 33 months. Bajaj Finance is now the country’s largest non-bank lender with total assets of Rs3.16 lakh crore at the end of September 2023 and a long-term credit rating of AAA, at par with most top banks.
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6. Other non-bank lenders that offer FDs include LIC Housing Finance Company and PNB Housing Finance. Their interest rate is slightly lower than that offered by other NBFCs but they are a good vehicle to reduce risk in your FD portfolio through diversification.
7. Small Finance Banks (SFB) such as Ujjivan SFB, AU SFB, Equitas SFB, Jana SFB, Utkarsh SFB, Capital SFB and Suryoday SFB among others also offer higher interest on their regular and terms deposits compared to regular or scheduled banks. For example, Equitas Small Finance Bank now offers an annualised interest rate of 8.5 percent for a term deposit with a tenure of 444 days while Ujjivan Small Finance Bank is offering 8.25 percent interest on 12-month tenure FDs.
In general, small finance banks have lower credit ratings than large NBFCs and full-size private sector commercial banks.
For example, both Equitas and Ujjivan SFBs are currently rated at AA while AU SFB is rated BBB+ which is lower than top NBFCs and banks.
8. Among banks, relatively smaller banks such as Bandhan Bank, RBL Bank, South Indian Bank, Yes Bank, IndusInd Bank and Kotak Mahindra Bank offer higher interest rates on deposits than their bigger peers in the private and public sectors. For example, RBL Bank is offering 8 percent for a term deposit with a tenure of 18 months to 24 months, while IndusInd Bank is offering 7.5 percent for FD with a tenure of 12 months.
9. If safety and liquidity are the prime concern, savers should opt for fixed deposits by public sector banks such as State Bank of India, Punjab National Bank, Bank of Baroda and IDBI Bank among others. However, they offer low-interest rates. Another option is AAA-rated private sector banks such as HDFC Bank and Axis Bank that currently offer 7.15 to 7.55 percent interest on a 1-year to a 3-year term deposit.
The best option for savers would be to divide their corpus over four to five lenders to balance the return and the risk. For example, an equal split of corpus among the five-highest yielding FDs would generate interest of well above 8 percent.
(Disclaimer: This article is for information purposes only. Readers are advised to consult a certified financial advisor before investing in any of the funds or securities mentioned above.)
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist)
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