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Sunday, September 09, 2001













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Lower-rated companies visit FD market

Suresh Krishnamurthy

THE lethargic fixed deposit market did not develop overnight a frenzy over the last few weeks.

Nevertheless, there are signs of lower rated companies such as Axles India, Wheels India, and SPIC accessing the market.

For such companies, the FD market presents an opportunity to mop up funds at lower costs. If these companies were to source funds from banks, they may have to pay upwards of 14 per cent on the advances. In the FD market, however, these companies are able to access one-year funds at anywhere between 10-11 per cent. Even adding a percentage point or two to costs, FDs now come cheaper than Bank funds.

The specific factors at work in the economy are also in the favour of these companies. The liquidity in the system, as evidenced by the significant flow of funds into bank-term deposits and mutual fund debt schemes, indicate that there is strong retail appetite for fixed income instruments.

Important, interest rates declined sharply in the past year. At 10 per cent for a one-year term deposit, these companies would be offering 2 percentage points more than what the Banks offer for a deposit with a similar maturity.

If they offer more than 10 per cent, their programme would appeal even more to the retail investor. ICICI Safety Bonds offers 9.75 per cent for a five-year investment option. This indicates how a one-year FD programme offering 10 per cent would be received in the market.

Overall, the stage appears set for an increase in the number of such lower rated manufacturing companies tapping the market. This is where the investors need to be cautious. There are a number of companies accessing the market, not for low-cost funds but because the regulations on disclosure of information are significantly lax.

Important, these companies do not need a rating to access funds from the retail market. As such, they companies may even be hiding deterioration in their financial performance when they access the retail fixed deposits market.

In fact, there is a case for the regulators to step in and mandate that these companies obtain ratings before accessing the FD market. The FD programmes of non-banking finance companies must be rated according to the RBI regulations. There is no reason why that of manufacturing companies should not be rated.

Investors cannot afford to ignore such programmes. They cannot invest only in the finance sector and in mutual funds that, in any case, invest heavily in the finance sector. In addition, there is value in some of these programmes such as those offered by companies from the TVS group. However, they should choose carefully. They must avoid groups that have defaulted on their obligations earlier.


Section  : Bonds & FDs
Previous : Axles India: Moving slow
Next     : TVS Srichakra NCD

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