Personal Finance

An attractive alternative to FDs

Radhika Merwin | Updated on May 20, 2018 Published on May 20, 2018

Park a portion of your surplus in Dewan Housing Finance Corporation’s NCD

Investors looking at alternatives to bank deposits can consider parking some of their surplus in Dewan Housing Finance Corporation’s (DHFL) public issue of non-convertible debentures (NCDs).

Given that bank deposit rates are hovering in the 6.5-7 per cent range, investors can earn a higher return by investing a portion of their surplus in the NCD.

DHFL is offering NCDs across four tenures — three, five, seven and ten years. Interest rates under these four options for a retail investor are 8.9 per cent, 9 per cent, 9 per cent and 9.1 per cent, respectively.

The company’s three- and five-year NCDs are good options for investors. The rate differential between DHFL’s NCD and comparable bank deposits, makes it an attractive offer.

After a steep fall over the past two years, rates on bank deposits have been inching up over the past two-three months. Over the past month, the yield on the 10-year government bonds have shot up by 40-50 basis points.

With rates moving up, it may be prudent for investors to avoid locking into rates for a very long time. DHFL’s three- and five-year tenure NCDs offer a good deal.

DHFL’s three-year option offers 8.9 per cent and five-year option 9 per cent to retail investors, with an annual coupon payout option. The company also offers a monthly payout option under three- and five- year NCDs, at 8.56 per cent and 8.65 per cent respectively. But if you are not in need of regular monthly cash flows, choose the annual option to benefit from compounding.

Trumps bank deposits

The interest rates offered by DHFL are better than bank deposit rates.

Banks, on an average, now offer rates in the 6.5-6.75 per cent range on deposits of up to three and five years (a few offer a higher 7-7.25 per cent). Hence, DHFL’s NCD offers rates that are nearly two percentage points higher than the best rates offered by banks.

The NCD issue has been rated ‘AAA/stable’ by CARE and Brickwork, indicating highest degree of safety regarding timely servicing of financial obligations and lowest credit risk. However, remember that NCDs are not insured like bank deposits (up to ₹1 lakh).

Non-banking financing companies (NBFCs) with similar risk profiles (rated AAA) also offer rates lower than DHFL’s NCD. Bajaj Finance and Shriram Transport Finance, for instance, offer 8.1 and 8.25 per cent, respectively, for deposits up to five years.

Other frills

DHFL also offers a floating-rate NCD with a three-year tenure, which is benchmarked to MIBOR (plus spread of 2.16 per cent). While this will help you gain as interest rates move up, the complexity in computation makes it difficult to track returns. If you prefer the predictability in rates, you can skip this option.

The company also offers incentive to loyal investors who hold their NCDs till maturity. The one-time incentive paid along with the last interest payment is available for NCDs with a tenure of five years and up, ranging between 0.5 and 1 per cent of the original investment.

The company

Dewan Housing Finance Corporation is one of the key players in the housing finance space. It has developed a niche in the lower middle-income group which, given the Centre’s push towards affordable housing, augurs well for its growth prospects. The company reported a growth of 33 per cent in its assets under management in FY-18.

It has also been able to maintain its asset quality; as of March 2018, its GNPA (gross non-performing assets) stood at 0.96 per cent of loans.

Risks

While the company has been able to maintain a stable asset quality, exposure to the lower- and middle-income groups pegs up the risk of defaults. Also, the share of riskier LAP (loan against property) in its portfolio has gone over the past year. This may need some watching.

Issue details: The public issue of up to 12 crore secured redeemable NCD of face value ₹1,000 each, opens on May 22. The minimum application size is ₹10,000.

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