The move is part of an exercise meant to protect depositors, while bringing about transparency in the fund-raising process. The government is looking to place restrictions on companies raising fixed deposits from the public, which often offer 2-3 % points higher interest rate than banks, but are seen to be riskier. The issue is being examined by the ministry of corporate affairs as part of a larger cleaning up exercise. Separately, the International Monetary Fund has also written to the government suggesting that the provision for companies to access deposits from the public should be reviewed as very few countries allowed this type of facility. While sources suggested that the government may not ban use of the tool, it is likely to place tighter controls to make the process more transparent and safer for depositors. However, home finance companies as well as some non-banking finance companies are unlikely to be impacted by the move. Data accessed on the website of two leading financial service distribution companies showed that there are currently only non-banking finance companies and home finance firms that are in the market to raise money through fixed deposits, and all of them are known names that enjoy high credit rating. They are offering between 7% and 8.25% interest on one-year deposits, compared to 6.4% that SBI is currently paying on FDs with a tenure of one-two years. For a five-year deposit, the gap is a little wider with the finance companies offering 7-8.6%, compared to SBI’s 6.75%. Sources said some of the deposits accessed by companies are actually shown as trade credit and are often opaque. Besides, there are no norms on the amount of deposits that can be raised and there have been discussions on linking it to the turnover or other financial parameters to ensure that companies remain credit worthy. While financial experts always advise clients to focus on a company’s credit rating before investing, depositors often ignore them and chase returns.
[Source: The Economic Times]