Falling NBFC rates may lower returns by up to 60 bps

Mumbai: NBFCs such as Mahindra Finance, LIC Housing Finance, PNB Housing Finance and Shriram Transport have reduced deposit rates for the third time in the past one year which will hit investors’ earnings as they will get 45-60 basis points less than what they did from these deposits a year ago.

Financial planners, however, advised investors to continue with these deposits as their rates are still higher by 100-200 basis points than what banks offer. In addition, they could allocate a part of their portfolio to high quality AAA-rated non-convertible debentures (NCDs) from the secondary markets.

“Investors could look at buying non-convertible debentures of highly-rated companies from the secondary markets,” says Rupesh Bhansali, head (distribution), GEPL Capital.

For instance, Tata Capital’s NCD, that is AAA-rated and pays an 8.9 per cent interest and matures in September 2028, trades at Rs 1010, giving yield of 8.95 per cent. The 8.45 per cent Tata Capital NCD maturing in August 2022 trades at Rs 1022, giving yield of 8.15 per cent.

Similarly, AAA-rated L&T Finance pays an interest of 9.05 per cent and matures in April 2027. It is trading at Rs 1075, at an yield of 8.55 per cent per annum.

NCDs score over fixed deposits as there is no tax deduction at source. However, liquidity is low and investors need to calculate yield and map the maturity date to their cash flows before buying.

Retirees and several senior citizens who depend on simple instruments like fixed deposits for their monthly expense have been affected due to lower interest rates on these instruments.

For instance, LIC Housing Finance has cut rates by 70 basis points thrice over the past one year. While it paid 8.3 per cent on a 5-year deposit in October 2018, now it pays a mere 7.6 per cent. Bajaj Finance has cut rates by 40 basis points and now pays 8.35 per cent on a 5-year deposit.