NBFCs vs Bank FD rates: Here's which one should you opt for

Fixed deposits have become attractive following a policy repo rate hike by the Reserve Bank of India (RBI) last month by 40 basis points to 4.4 percent. Also, risk-free fixed deposits have become a more viable option, especially amid volatile equity markets.

While a number of banks have revised interest rates on fixed deposits in the past three weeks, non-banking financial companies (NBFCs)/housing finance companies (HFCs) are not far behind. At present, two top NBFCs, Shriram Transport Finance and Bajaj Finance Ltd are offering FD interest rates of over 7 percent for deposits, higher than the bank interest rate offered by IndusInd Bank of 2.75-6.50 percent to non-senior citizens. Senior citizens enjoy an additional 0.25-0.50 percent interest rate per annum on their savings.

So which one should an investor pick? Here's a look at some of the rates offered by banks and NBFCs.

 

 

During the COVID-19 pandemic as interest rates were cut, customers turned to FDs offered by NBFCs as their rates were better than those at banks. Both NBFCs and banks are regulated by the RBI. However, there are certain pitfalls in investing in NBFCs. For example, NBFCs levy higher penalties for premature termination of FDs than banks. In such cases, the interest rate payable is 3 percent lower than the lowest interest rate on the application form if termination is done within a year and 2 percent of the applicable rate if the FD is terminated after 1 year. Hence, if a customer has invested in an FD with an interest rate of 7 percent and terminates it after a year, the customer will get 5 percent interest rate instead of the earlier 7 percent. Banks, on the other hand, charge only 1 percent penalty for early termination.

Customers should also note that NBFCs do not come under the Rs 5 lakh guarantee provided by the Deposit Insurance and Credit Guarantee Corporation (DICGC).