How safe are corporate Fixed Deposits?

- The Economic Times

http://economictimes.indiatimes.com/articleshow/7799016.cms?prtpage=1

Mon, Apr 18, 2011 | Updated 03.56PM IST

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4/18/2011 7:38 PM

How safe are corporate Fixed Deposits? - The Economic Times

http://economictimes.indiatimes.com/articleshow/7799016.cms?prtpage=1

28 MAR, 2011, 01.29AM IST, PRIYA KAPOOR,ET BUREAU

How safe are corporate Fixed Deposits?

It has been more than five years since his fixed deposits matured, but Delhi-based Ramesh Kumar is yet to get his money back. He has made countless calls to the company and used up reams for filing complaints, but to no avail. "The officials say that the company is facing a financial crunch. I have almost lost hope of getting my money back," says the octogenerian. Kumar made the cardinal mistake of investing in a corporate fixed deposit without assessing the credentials of the company or looking at its repayment record. "The interest rate was higher than that offered by banks and I needed money for my expenses after retirement," he says ruefully. He is not alone. An estimated Rs 1,000 crore of small investors' money has been lost in this way. The fixed deposits have long matured, but issuers don't have the money to repay the investors. The Investor Helpline launched by Delhi-based Midas Touch Investors' Association has around 3,500 grievances relating to unpaid fixed deposits pending with it. "This is a just a fraction of the actual default cases. What's shocking is that some of these companies had nationalised banks as trustees, who had an obligation to oversee timely payments as per Sebi rules. However, they didn't do much to protect the depositors," says Virender Jain, founder of Midas Touch. Not all companies in the defaulters' list are obscure names like Chain Roop Bhansali's CRB Capital. The list includes established names, such as Lloyds Finance, Morepan Laboratories, Escorts Finance, DCM Financial Services, Nagarjuna Finance, Duncan Industries and Kirloskar Investments and Finance. Over the past few years, several companies have turned to the public to raise capital to fund their expansion plans. They have done so because banks have raised lending rates. More importantly, it has become increasingly difficult for dubious companies to borrow from banks. The Reserve Bank of India has directed the banks to lay greater stress on due diligence before extending corporate loans. Sometimes, companies borrow to fund their projects but use the money for working capital needs or to retire outstanding debts. The RBI wants the banks to ensure that the funds are used for the purpose for which they were borrowed, not for diverting to other activities. However, most investors are oblivious to these undercurrents. They think that fixed deposits from established companies are as safe as any other fixed deposit. "I was taken in by the names of issuing companies and thought they were trustworthy. How else can you take a decision?" asks Kumar. What makes matters worse is that corporate fixed deposits are unsecured loans that do not guarantee anything to the investor in case of a default. When you invest in a bank fixed deposit, the Deposit Insurance and Credit Guarantee Corporation ensures that Rs 1 lakh per bank is repaid to you in case of a default. But there is no guarantee for deposits with companies and NBFCs. Of course, this does not mean that all company fixed deposits are unsafe. It's just that you need to pick the right companies. Banks have the wherewithal and systems in place to assess the repayment capacity of a company. How would an ordinary investor know whether the issuer of the corporate fixed deposit will use the funds prudently? This is where credit rating of fixed deposits comes into the picture. Rating is assigned to an instrument by a credit rating agency after a comprehensive analysis of business risks, financial risks and management quality. These agencies primarily assess the adequacy of cash flow in meeting the debt servicing obligations. The credit rating is a hallmark of quality for a fixed deposit. Experts consider these an important factor while deciding on investments. "Credit ratings are a fairly reliable indicator of the risk for short-term debt products, especially fixed deposits in companies," says Harsh Roongta, CEO, Apnapaisa.com. "We tell our clients not to invest in company deposits if there is no credit rating assigned to them," says Anil Rego, chief financial planner, Rights Horizon, a Bangalore-based financial planning firm. Credit rating agencies revise their ratings in case of a significant change in the business or financial risk profile of the issuer. Experts recommend that investors should keep tabs on the same. "If the rating falls below a level that one is comfortable with, it is a signal to withdraw your investments," says Anjan Ghosh, head of corporate sector ratings at Icra Ltd. Concurs DR Dogra, managing director and CEO, CARE. "The investor must keep track of this change in rating by checking the website of the rating agency," he says. For the investor, the choice is simple: invest in high quality fixed deposits and earn a lower rate or go for a high interest and risk your entire capital. Choose what you think is best for you.

Please send your feedback to etwealth@indiatimes.com

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4/18/2011 7:38 PM

How safe are corporate Fixed Deposits? - The Economic Times

http://economictimes.indiatimes.com/articleshow/7799016.cms?prtpage=1

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