Prime Recommendation: Lock into these rates before they are cut

Share on whatsapp
Whatsapp share
Share on twitter
Tweet it out
Share on facebook
Share on FB
Share on linkedin
Post on LinkedIn

Given rate adjustments by other banks and NBFCs recently, a significant rate cut may soon be in the offing in this deposit as well. Investors and seniors looking for deposit options should lock into this FD before rates are revised.

These are hard times for fixed deposit investors, with all the entities that offer relative safety of capital busy slashing their deposit rates. As we write, leading banks such as SBI and HDFC Bank have already reduced their rates on 1 to 5-year fixed deposits to 5.7% and 6.15% per annum respectively. Small savings schemes, after recent resets, now offer just 5.5% for 1 to 3-year deposits and 6.7% for the 5-year deposit.

high rate deposit

But one reputed entity that offers safety with relatively good rates is India’s largest home finance company – Housing Development Finance Ltd (HDFC). HDFC has not revised its interest rates on smaller retail deposits since December 24, 2019. Given rate adjustments by other banks and NBFCs recently, a rate revision may soon be in the offing when there will be significant cuts. Investors and seniors seeing deposit options should lock into this FD before rates are revised.

Which tenures?

While HDFC offers fixed deposits for 12 to 84-month tenures, with interest rates at a two-decade low it is best for FD investors to stay only with its less than 3-year FDs currently. By sticking with short tenures even for your long-term savings, you will be able to benefit from any reversal in the interest rate cycle that comes up in the next two years. Such a reversal is quite likely once the COVID crisis abates, the economy resumes activity and financial market conditions normalise. This process is unlikely to take beyond a year or two. Locking into 3 year plus deposits today will force you to lock into record low returns.  

Keeping this in mind, we recommend that retail investors stick with four specific tenures from HDFC Ltd.

For regular income investors, the 15-month deposit offering 7.22% (only monthly, quarterly and half yearly interest are available in this tenure), the 22-month deposit offering 7.45% (for annual pay-out), the 30-month deposit offering 7.4% (for annual pay-out) and the 33-month deposit offering 7.5% (for annual pay-out). Do note that rates are lower of you choose more frequent pay-outs.

Those seeking cumulative options can go for the 15-month deposit offering 7.35%, 22-month deposit offering 7.45% or the 33-month deposit offering 7.5%. These are rates applicable for deposits less than Rs 2 crore.

Senior citizens will receive 0.25% more on the same deposits. If you opt for the monthly payout in the above, you’ll have to deposit a minimum of Rs 40,000. For quarterly, half yearly or annual pay outs or the cumulative option, the minimum deposit is Rs 20,000. 

Features    

Should you need cash for an emergency, HDFC allows premature withdrawal after the expiry of three months at the discretion of the company. Deposits broken within 6 months will earn 4 %. Those broken after 6 months but before maturity date will receive interest at a rate 1% lower than the prevailing rate for deposits of that tenure. If there’s no deposit of that tenure, the rate will be 2% lower than the minimum FD rate from HDFC. There’s also a loan facility available for upto 75% of the deposit value at interest rates that are 2% higher than the deposit rate.

About HDFC

HDFC, incorporated in 1977, has a track record of over four decades in financing home mortgages and related activities in India. It is the rare deposit-taking entity to have enjoyed a AAA rating for its deposits from two rating agencies consistently for 25 years. Strong subsidiaries such as HDFC bank, HDFC Life, HDFC AMC, HDFC Ergo General Insurance, many of which are in market leading positions, further add to its size and balance sheet strength.  

As of December 31 2019, HDFC had a gross loan book of Rs 5.05 lakh crore, made up of 76% mortgage loans, 5% corporate loans, 11% construction finance and 8% lease rental discounting. 90% of the loans were to individuals. With individual housing loans making up the bulk of HDFC’s book, its lending business has been quite resilient to ups and downs in the economic cycle in the past. Improving home loan affordability (the average loan to income ratio is less than 4 times) and a conservative loan to value ratio of 70% has helped HDFC keep its bad loans within a tight band, despite the NBFC crisis of the last couple of years.

As a long-standing mortgage financier, HDFC has built up a diversified funding base made up of ECBs, market borrowings, term loans and public deposits with retail deposits accounting for about a third of its funding. This diversified fund base has helped it retain Net Interest Margins within a tight band of 3.2-3.3%. As of December 31 2019, HDFC reported a moderate gross NPA ratio (Non-Performing Assets ratio) of 1.36%, 0.75% on individual loans and 2.91% on wholesale loans.

The moratorium announced by the central bank could lead to interrupted loan repayments and delayed cash flows. The deferment also creates moral hazard where borrowers may skip repayments even after the moratorium period ends. HDFC’s increasing focus on affordable home loans to low and middle-income groups in the last couple of years raises this risk. 

Over the current and next couple of quarters though, HDFC’s financials could see temporary stress as the lock-down interrupts household incomes and clouds job prospects. The moratorium announced by the central bank could lead to interrupted loan repayments and delayed cash flows. The deferment also creates moral hazard where borrowers may skip repayments even after the moratorium period ends. HDFC’s increasing focus on affordable home loans to low and middle-income groups in the last couple of years raises this risk. The mortgage business is particularly prone to asset liability mismatches.

However, HDFC is much better placed than most other NBFCs/HFCs to weather this turbulent phase. For one, as a premium borrower in the Indian debt market with a strong reputation and deposit franchise, it is likely to continue to enjoy access to funding from multiple sources even if at slightly higher costs than before. Two, given that individual housing loans are often secured against mortgages on self-occupied homes, this is one category of loans that is not just secured but also actively disincentives default, as very few loan-takers would like to risk losing the roof over their heads.

Suitability

Despite its rock-solid track record, HDFC is a non-bank that does carry business risks related to leveraged lending. Investors must therefore consider HDFC deposits as a diversifier for their regular income/fixed income needs, after exhausting safer options such as bank deposits (with SBI, HDFC Bank) and the post office Senior Citizens Savings Scheme. Excessive exposure to a single deposit-taking company is best avoided.

Share on whatsapp
Share via Whatsapp
Share on twitter
Tweet it out
Share on facebook
Share on FB
Share on linkedin
Post on LinkedIn

More like this

Please note that any specific queries on any of our recommendations will be answered ONLY through email. If you are a subscriber, please mail contact@primeinvestor.in.  Only general queries or discussions will be answered through the comment section of the blog. For full details, please refer to this post – How to communicate with PrimeInvestor.

9 thoughts on “Prime Recommendation: Lock into these rates before they are cut”

  1. Why not Rbi bonds which offer 7.75% for a 8 year period.. if cumulative yield becomes close to 7.9 Ma’am

    Regards
    Praveen

  2. hi what about NRIS will these deposits be charged as per normal account
    I already have a hdfc account but an nri one

Leave a Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Register for FREE!

Gain instant access to more PrimeInvestor articles, researched products, and portfolios

The essence of PrimeInvestor

Register for FREE!

Gain instant access to more PrimeInvestor articles, researched products, and portfolios

Legal Disclaimer : PrimeInvestor Financial Research Pvt Ltd (with brand name PrimeInvestor) is an independent research entity offering research services on personal finance products to customers. We are a SEBI registered Research Analyst (Registration: INH200008653). The content and reports generated by the entity does not constitute or is not intended to constitute an offer to buy or sell, or a solicitation to an offer to buy or sell financial products, units or securities. All content and information are provided on an ‘as is’ basis by PrimeInvestor Financial Research Pvt Ltd. Information herein is believed to be reliable but PrimeInvestor Financial Research Pvt Ltd does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. The services rendered by PrimeInvestor Financial Research Pvt Ltd are on a best-effort basis. PrimeInvestor Financial Research Pvt Ltd does not assure or guarantee the user any minimum or fixed returns. PrimeInvestor Financial Research Pvt Ltd or any of its officers, directors, partners, employees, agents, subsidiaries, affiliates or business associates will not liable for any losses, cost of damage incurred consequent upon relying on investment information, research opinions or advice or any other material/information whatsoever on the web site, reports, mails or notifications issued by PrimeInvestor Financial Research Pvt Ltd or any other agency appointed/authorised by PrimeInvestor Financial Research Pvt Ltd. Use of the above-said information is at the user’s own risk. The user must make his own investment decisions based on his specific investment objective and financial position and using such independent advisors as he believes necessary. All intellectual property rights emerging from this website, blog, and investment solutions are and shall remain with PrimeInvestor Financial Research Pvt Ltd. All material made available is meant for the user’s personal use and such user shall not resell, copy, or redistribute the newsletter or any part of it, or use it for any commercial purpose. PrimeInvestor Financial Research Pvt Ltd, or any of its officers, directors, employees, or subsidiaries have not received any compensation/ benefits whether monetary or in kind, from the AMC, company, government, bank or any other product manufacturer or third party, whose products are the subject of its research or investment information. The performance data quoted represents past performance and does not guarantee future results. Investing in financial products involves risk. Investments are subject to market risk. Please read all related documents carefully. As a condition to accessing the content and website of PrimeInvestor Financial Research Pvt Ltd, you agree to our Terms and Conditions of Use, available here. This service is not directed for access or use by anyone in a country, especially the USA, Canada or the European Union countries, where such use or access is unlawful or which may subject PrimeInvestor Financial Research Pvt Ltd or its affiliates to any registration or licensing requirement.

Aditya Birla Mutual FundAxis Mutual Fund Baroda Mutual FundBNP Paribas Mutual FundBOI AXA Mutual FundsCanara Robeco Mutual FundDSP Mutual Fund Edelweiss Mutual FundEssel Mutual FundFranklin Templeton Mutual FundHDFC Mutual FundHSBC Mutual FundICICI Mutual FundIDBI Mutual FundIDFC Mutual FundIIFL Mutual FundIndiabulls Mutual FundInvesco Mutual FundITI Mutual FundKotak Mahindra Mutual FundL&T Mutual FundLIC Mutual FundMahindra Mutual FundMirae Asset Mutual FundMotilal Oswal Mutual FundNippon India Mutual FundPGIM Mutual FundPPFAS Mutual FundPrincipal Mutual FundQuant Mutual FundQuantum Mutual FundSahara Mutual FundSBI Mutual FundShriram Mutual FundSundaram Mutual FundTata Mutual FundsTaurus Mutual FundsUnion Mutual FundsUTI Mutual FundsYes Mutual Funds

Equity: Large Cap Funds | Mip Cap Funds | Large And Mid Cap Funds | Small Cap Mutual Funds | Contra Mutual Funds | Dividend Yield | Focused Mutual Funds | Find Top Index Funds | Best Sector Funds | Thematic Mutual Fund | Best Value Mutual Funds | Equity Linked Savings Scheme | Tax Saving Funds
Debt: Banking And PSU Funds | Corporate Bond Funds | Credit Risk Funds Mutual Funds | Dynamic Bond Funds | Floating Rate Funds | Gilt Mutual Funds India | Find Top Liquid Funds In India | Long term debt funds | Low Duration Funds Debt Funds | Medium Duration Debt Funds | Medium To Long Duration Funds | Money Market Debt Funds | Overnight Debt Funds | Short Duration Debt Funds | Ultra Short Term Debt Fund
Hybrid: Aggressive Hybrid Funds | Arbitrage Mutual Funds | Balanced Advantage Mutual Funds | Conservative Hybrid Funds | Dynamic Asset Allocation | Equity Saving Funds | Multi Asset Funds | Multi Asset Allocation

Mutual fund rolling returns by category: Balanced Advantage | Conservative Hybrid Fund | Corporate Bond | Dividend Yield | Dynamic Bond | Equity Linked Savings Scheme | Floating Rate | Index Funds | Large and Midcap fund | Large Cap Fund | Liquid funds | Low Duration | Mid Cap Fund | Multi Cap Fund | Short Duration | Small cap Fund | Solution Oriented – Childrens Fund | Ultra Short Duration

Login to your account
OR