Non banking financial companies in India:-
Apart from banks there are companies in India that accept money from general public for a fixed term and pay interest. These companies are authorized by the Reserve Bank of India to perform these tasks under specified regulations of RBI. However RBI does not guarantee on any sort of transactions or trades entered into with these institutions. In other words the institutions are not actually backed by the Reserve bank. There are set of guidelines and instructions from RBI to investors who are willing to invest in NBFCs. These instructions can help protect a person’s interest in investing in these companies.
Fixed deposit scheme is one of the schemes that are offered by NBFCs and there are specific permissions required to offer these schemes to public apart from regular authorization.
Features of company fixed deposit:-
Term: The term of company fixed deposits are usually less because when it comes to these deposit schemes the performance of the company and rating may change with time. So as a matter of insecurity shorter terms are preferred. The term as regulated by RBI cannot be less than 12 months or more than 5 years.
Types of company FD: There are two types of fixed deposit schemes namely cumulative and non-cumulative fixed deposit schemes. Non Cumulative schemes as the name suggests pay off the interest earned on investment on regular basis (half yearly basis or annual basis) so the interest will not get acquired on principal to earn higher interest in the years to come. Cumulative fixed deposit scheme on the other hand where the interest accumulates with principal so as to earn higher returns when compared to non-cumulative plan. This scheme pays interest accrued on deposit schemes on maturity of the deposit.
Rating of a company: There are certain institutes (CRISIL, ICRA etc) that rate a company based on net owned fund (NOF) of the company. The companies are rated based on certain ceilings and slabs (ex: NOF more than 200 lakhs be rated in certain category) and based on the rating a person may decide whether he should invest or not in a company.
Interest rates: Interest rates on fixed deposit schemes offered by a company are higher than regular banks. This is one of the major reasons that people are interested in these schemes these days. The interest rate offered on the FDs is limited to a maximum of 12.5% by the Reserve bank of India and this figure can vary with time. A person has to stay updated about this information before depositing in these schemes. The interest rates available today in market range from 9% to about 12.25%. (coupon)
Pre-mature withdrawals: Premature withdrawals are permitted in these schemes and the lock in period of these schemes will be 3 months. Interest accrued and penalties are as per the terms and conditions of the company.
The person who is willing to deposit in company fixed deposits has to be conscious and updated about regulations of RBI and also current happenings in the industry. Here are few points that can help a person in this regard.
- The company where the investment as deposit is made should be authorized by the Reserve Bank of India to accept money for fixed deposit schemes and the registration of permission for such schemes should be displayed in the offices of the company.
- Rating of a company plays a major role while investing in fixed deposit schemes. This rating process renders the company’s worthiness for investment. Companies with lower rating in a financial span can also be denied permission to offer fixed deposit schemes. There are set of instructions wherein the company will have to inform the RBI about the financial crisis (if there are any) within certain duration and then stop accepting public deposits.
- The interest rate provided on fixed deposits of companies is regulated by RBI.
- The person who has issues related to receiving interest earned on deposits or principal can approach Company Law Board and launch a complaint in this regard. The board would direct the company and arrive at solutions to the problem faced.
Benefits of Company fixed deposit:-
There are few benefits of company fixed deposit that makes it preferable over other counterparts.
- Interest rates in general are 2 to 3% higher than bank fixed deposits
- On a short term they earn better income with good liquidity
- The deposit scheme also has nomination facility
- The application process and eligibility clauses are much simpler than those of regular bank fixed deposit scheme