Features for next generation bank FD? Inputs needed

[lordsheavenlydaughter]

In the current environment, where debt mutual fund returns are very poor (last 3 month pre-tax returns for the best overnight/liquid/short duration funds are (0.75%-1.25% i.e between 3-5% annualized), bank fixed deposits suddenly look more attractive. Especially those of many strong but less known banks (small private banks & small finance banks that are RBI Scheduled banks with deposit guarantee).

When I speak to people around, concernts/constrains on investing in bank FDs seem to be

a. Trust/Safety (what if it is another PMC bank)

b. Convenience (can I open & operate account digitally)

c. Awareness (I didn't know I can earn 7% on a bank FD. My bank offers 4.5%)

Any other concerns/constraints come to mind ? How to address them?

If you have been in the camp of FDs are boring/low return & debt MFs are the right choice, what will prompt you to revisit & change that view ?

 

[librarian]

@lordsheavenlydaughter

RBI Scheduled banks with deposit guarantee

Isn't that guarantee limited to 5L rupees?

Any other concerns/constraints come to mind ?

To anybody who's financially sound in the least and knows about the crash of 2008 the first concern should be how is a bank even in a position to offer them that kind of ROI.

To offer an interest rate of 7% they need to be giving out loans that are at 8.5-10% to the borrower. Who would be borrowing at interest rates that high in this economy?

Subprime borrowers.

In India the biggest problem is people never give second thought to a too-goood-to-be-true deal and think that there are businesses which are willing to operate at less profit than others. That's almost never the case.

 

[jesussaves18]

@librarian Hmm sounds about right. But who are these subprime borrowers? And why this subprime lending is being allowed at such a large scale? Why is it not reflecting in the ratings of these commercial banks?

 

[librarian]

@jesussaves18

But who are these subprime borrowers?

People who don't have a good enough credit history or collateral required to borrow from the big banks. Take an example of education loans for instance. Another case would be personal loans for daughter's marriages and stuff by people already in debt. A home loan to somebody who doesn't have a stable income source and a bad credit history of repayment. Could just be the current Harshad Mehta or Vijay Mallaya.

Why is it not reflecting in the ratings of these commercial banks?

When have the ratings agencies ever done their job properly?

You'd find articles like[1] that claim that the 7% interest rate is just a result of competition.

But figure me this- SBI is currently offering home loans@ 6.8% should you have a decent enough credit score. These guys aren't writing the actual "AA" variety home loans, no way.
Even if I accept the premise that this is the free market at work I want to know who's footing the bill here because it sure as hell isn't the bank, a private bank no less that has no support from the government.

Therefore I believe the risk factor on these FDs is just as risky as holding NCDs if you're going beyond the insured limit. If you want to take a risk still, understand that an FD with these banks is not the same as an FD with a systemically important bank like HDFC, ICICI or SBI.

[1] https://www.livemint.com/industry/b...offering-a-7-deposit-rate-11591550230167.html

 

[rosebuds1111]

@librarian

Isn't that guarantee limited to 5L rupees?

This happens only when bank fails. Govt or RBI steps in, stops failing of bank and locks your amount by limiting max withrawable amount to 10k. Now your 4.9 L is with bank. Since bank has not failed you will not get the amount. Your interest accumulation will stop as bank will change rules. After 5-6 years if you are lucky, you will be able to get your money with interest of the same period wasted. Though you'll surely get the gift of hypertension in such a case.

 

[yuliza]

@librarian

Isn't that guarantee limited to 5L rupees?

The guarantee only applies if the bank fails. Usually RBI steps in and then limits the withdrawal to some absurd amount like 10k and then tries to resolve the issue itself.

 

[maccanuck]

@yuliza That is only to limit bank runs. Do that influx of all depositors trying to withdraw all at once does not create a crash.

 

[yuliza]

@maccanuck True. But this is not the best way to go about. Deposit insurance actually costs the customers and shareholders of the bank as premiums are supposed to be paid by the bank.

Would you pay for insurance and still not use it when needed?

 

[rjj4321]

@lordsheavenlydaughter I was invested with Yes Bank considering their high return. I couldn't take out my own cash for a medical emergency exactly when they went under.

Never again. My emergency fund is now split between HDFC and SBI. Everything else goes to market through equity/debt/gold.

Just my exp and $0.02

 

[yuliza]

@rjj4321 bored mindless wild chubby exultant history silky pet quack money

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