Why Company Fixed Deposits Pay Higher Interest Rate Than Banks?

It's an often asked question by most individuals on why companies fixed deposits give higher interest rates then banks. There are many reasons for the same. Some of which could be as follows.

a) Interest rates work lower for companies from public deposits

Most of the times it could mean be that interest rate paid by companies on fixed deposits for companies could be lower than that they pay to banks. Let's give an example. If banks pay an interest rate of 11.50 per cent to the bank, they could still raise money from individuals by way of company deposits at rates much lower than that. For example, if they can raise money at around 9.5 per cent, this could still be cheaper than that raised from banks.

b) Always difficult for an unrated company to raise money from banks

It may also be difficult for an unrated company to raise money from banks. They could therefore offer a higher rates of interest for company fixed deposits.

c) Company fixed deposits are not secure deposits

Company deposits are not very secure. Therefore, they have to offer a higher interest rate. Bank deposits on the other hand are very secure and hence their fixed deposit interest rates are lower. They would not care to raise money as they would anyways attract money from depositors.

d) What to look for in a company fixed deposit?

As mentioned earlier in the article, bank deposits are not secure deposits. If the company goes financially bankrupt the chances are bright that you would lose your money. Therefore, the best way would be to look for company deposits that have a AAA rating. These are accorded by rating agencies like CRISIL and ICRA and are considered very safe.

Conclusion

Company fixed deposits offer higher interest rates, but they do come with an element of risk. In case you want to invest, the best way would be to look for highly rated deposits. At the moment we have companies like Bajaj Finance, Shriram Transport Finance, KTDFC and Mahindra Finance whose deposits are highly rated and are safe.

In any case before investing, it's best to consider highly rates deposits.

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