FD Mania - Back to Square One
Its a phase now when investors have experienced it all. It started off with the blows from the NBFCs, which duped the investors left, right and center. No soon had the investors recovered from the shock, they were exposed to the booming IPOs market. With companies getting listed at exorbitant prices, investors made money. But soon the party was over here too. Then there was this option of Mutual Funds - so many of them came out with initial offers at unit price of Rs.10/- each. Most are quoting lower than the offer price now. Then came the recent downturn of investments in the bonds. And last but not the least - the equity markets. With the Sensex having slipped from the last six months high of 6000 points to below 3400 points, one can imagine what would have been the plight of the retail investors.
So where does all this leave them? Can any logical person make sense out of what is happening in the markets? Will any investor dare to go back to where he has just come from? Well, the answer should be no. But ironically though, the case seems to be something else.
During the last two months, the Fixed Deposit (FDs) collections have increased by 20 percent on an average. Obviously because the investors are now looking for more secure investments that can fetch them assured returns, though not very high. The interest rates on FDs of one year maturity offered by corporates and NBFCs, ranges between 9 to 13 percent presently. Even then, there is consistent increase in the FD collections.
One point to be kept in mind here is that, at present, the deposits are flowing only to the leading corporates and NBFCs. HDFC, Mahindra & Mahindra Finance and Escorts Limited to name a few. But how long can this go on? A handful of companies cannot keep accepting deposits, which is expected to increase further considering the rate at which these are growing. At some point, these companies may be forced to stop accepting deposits. Some leading companies like Telco and Godrej have already stopped taking deposits. The leading NBFC, Sundaram Finance also follows a policy of accepting limited deposits. Moreover, raising funds through FDs is no longer attractive to corporates as they have cheaper options like bank finance. Once the saturation point is reached here, where then will the investors go?
Two options will be left open. One, the public sector banks. And two, the low profiled NBFCs. The former could be a right choice as these investments are relatively safer though the returns are not very attractive. And coming to the second option, which will definitely try to attract investors by offering abnormal rates of interest, the situation might get dicey.
With this possibility then, is there another pit likely to be dug for the investor. Will investors run after these interest rates and burn their fingers again? Will history repeat itself? Is there another CRB in the making? If we restrict ourselves to the top few, by giving all our savings in the hands of a few, are we giving birth to powerful financial entities that will make the markets dance to their tune?
No, if the investors exercise caution this time at least. Its high time they understand that it is better to get few paise less than to pay few dollars more. So what, if bank deposits are not very glamorous. They still are pretty and their beauty will never die as long as the vagaries in all other markets exist. We all need to relook at our age old saving mechanisms that have been our companions through all the ups and downs.
Tanuja R Nemivant