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Bajaj Finance Ltd, a non-banking finance company (NBFC), has raised its fixed deposit (FD) rates, effective Tuesday, with the highest rate now fixed at 7.45% for senior citizens for a period of 44 months. For non-senior citizens, the highest FD rate stands at 7.20% for the same tenor (44 months). A 12-month cumulative FD will fetch 5.75%, while a 15-month FD will get 6% (for non-senior citizens).

Here is why a hike in fixed deposit rates by Bajaj Finance matters.

After interest rates were cut amid the pandemic, many customers found the FD rates offered by NBFCs better than those at banks. Both banks and NBFCs are regulated by the Reserve Bank of India (RBI).

Among NBFCs, two institutions have become popular for their corporate FDs—HDFC Ltd and Bajaj Finance. Now, with the impending merger of HDFC Ltd with its associated bank, Bajaj Finance is likely to benefit and see further growth in FDs.

Bajaj Finance started accepting FDs from individuals in January 2014. The size of its FD programme has since grown to 30,800 crore (as of Q4, FY 22). Bajaj Finance primarily earns money by giving loans and it accounts for an overall customer base of 57 million. Its net non-performing assets stood at 0.68% as of March 2022.

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FDs help the company access capital at competitive rates, thereby creating a model similar to that of a bank. Bajaj Finance can also cross-sell financial products to its FD holders—a base of 3.5 lakh depositors who have around 8 lakh FDs with the company. In total, FDs account for 19% of Bajaj Finance’s liabilities at a group level. Its FDs are rated AAA by CRISIL and ICRA.

Interest rates on Bajaj Finance FDs are slightly higher than what banks offer. The highest rate (for senior citizens) will be 7.45% with effect from 10 May.

Bajaj Finance allows you to start FDs of tenures ranging from 12 to 60 months. On average, Bajaj Finance depositors create FDs of 3.5 lakh and keep them for a period of 30-33 months with the company.

“You don’t have to go to a branch anymore. You can book FDs end-to-end on our website or app and around 9% of our deposits come from this direct route," said Sachin Sikka, executive vice president and group business head for deposits & investments at Bajaj Finance.

‘Going direct’ does not get you a higher interest rate. The company tried to offer a 0.1% higher rate to direct customers, but subsequently rolled it back. However, during the pandemic, the lender worked hard on improving the experience on its website and app, thereby making it easier for customers to directly start FDs. The website gets around half a million visitors per month for deposits, according to Sikka, and about 7-9% of those who start the journey ultimately book a FD.

Sikka is particularly proud about the nudges on the NBFC’s website that encourage people to choose the highest possible interest rate. For instance, the company has a special high rate for a tenure of 44 months.

According to Sikka, there are alternatives to FDs like government bonds or even deposits that can be started with small finance banks.

However, there is a lack of awareness about how to buy the former even after the creation of the Retail Direct Platform by the RBI. Small finance banks are covered by a 5 lakh guarantee by the Deposit Guarantee Corporation of India, but are still to gain popularity among customers.

However, savers should also note the pitfalls here. Penalties for premature termination of FDs are higher at NBFCs than banks. The interest rate payable, in such cases, is 3% less than the lowest interest rate on the application form if the FD is terminated within 1 year, and 2% of the applicable rate if terminated after 1 year. In other words, if you terminate your FD after 12 months and the applicable interest rate is 7%, you will get a 5% interest rate instead. In contrast, banks generally charge a 1% penalty.

NBFCs are also not covered by the 5 lakh guarantee provided by the Deposit Insurance and Credit Guarantee Corporation (DICGC). NBFC deposits are not secured by assets—you have to rely on the financial health of the institution you are placing your money with.

Bajaj Finance has FDs for tenures ranging from 12 months to 60 months. However, according to Sikka, most FDs are in the 30-36 months bracket, suggesting a cautious approach byhousehold savers.

Bajaj Finance raised interest rates on its FDs recently—on 25April. However, given the surprise 0.4% hike in the repo rate by the central bank on 4 May, the NBFC is going for another hike on 10 May.

Savers should watch out for further rate hikes in the current scenario before deciding to book an FD. Shorter deposit tenures will also allow you to reinvest the maturity proceeds at higher rates, if interest rates keep climbing.

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