Corporate Fixed Deposits

Corporate Deposit Meaning:

A Corporate deposit is an interest bearing deposit bank product offered to corporate banking customers by banks and accredited financial institutions. Corporate deposit target customers can include large commercial companies, public institutions, government agencies and large non profits. It contrasts to retail deposits which are held by consumers and business deposits that are held by SMEs. Corporate banking clients may use this type of product as a cash management solution when managing the optimal mix of liquidity and returns of surplus funds as it may provide an investment stream.

Corporate Deposit Example:

More recently corporate deposit versus retail deposit offerings will likely be affected by the Basel iii liquidity rules, with the regulations giving a preference to ‘sticky money’, which is deposits that are more likely to be held by the banks on an ongoing basis such as retail term deposits, as they tend to roll them over when the deposits mature. However large corporate can have large cash reserves and which is another funding source for banks.

A common misconception is that company fixed deposits are not wise investment choices when the deposit rates offered by the banking institutions are “high”. On the contrary, wisely chosen company fixed deposit products should always have a place in an investor’s debt portfolio.

The reason for this is simple – interest rates should not be considered in isolation. Rather, they should be considered in relation to the prevailing inflation rate or the rate at which the rupee is losing value in the market. An astute investor will observe two things – one, whatever be the ongoing annual inflation rate is, the deposit rates offered by institutions are a notch (a couple of percentage points) lower than that and two, the average company deposit offers a slightly better rate than the bank fixed deposit for a comparable term. Putting the two together, an investor will always know that the company fixed deposit gives an interest rate that is closer to the current rate of inflation at a point in time compared to a similar bank FD product.

Of course, the key is, as in all things in life, moderation. The company deposits give a slightly higher interest rate because there is a slightly higher risk associated with them. The “credit risk” associated with a company fixed deposit should be factored into while making a decision on where to invest.

The simple thumb rules to keep in mind are the following:

  1. Spread your investments – an investor has a choice between PSU banks, private banks and companies when it comes to deposit options. Simply, divide your deposit portfolio into three equal parts for these categories.
  2. Choose your companies wisely – no un-rated companies regardless of how high a rate they offer, and preferably chose companies that are part of a larger group so the risk is mitigated. And finally,
  3. Choose the company deposits for the part of the portfolio that has the shortest tenure – say 1-2 years.With this approach, an investor will have the potential to make a good risk-adjusted return from their deposit portfolio