Inflation has continued to rage on around the world and global central banks have taken to fire fighting by aggressively hiking interest rates. RBI (Reserve Bank of India) has also been doing the same. It increased the bank repo rate by 50 basis points last week. A little before that, LIC Housing Finance came up with higher interest rates on its deposits. Are these rates attractive? Also, how do they compare with the fixed deposits of other highly rated NBFCs (non-banking financial companies)?
Here’s what you must know before investing in these deposits.
All about LIC Housing’s FDs
As a leading housing finance company backed by the insurance behemoth LIC, the NBFC can be safely relied upon with respect to the safety of all fixed deposits.
The deposits are rated AAA/Stable by Crisil and, therefore, pose no principal or interest repayment risks. Two types of deposits are offered by LIC Housing Finance – cumulative and non-cumulative (with monthly and annual interest payouts).
The tenures on offer are one year, 18 months, two years, three years and five years. The interest rate on offer ranges from 6.3 per cent to 6.95 per cent for annual interest payout and cumulative deposits. In the case of monthly interest payouts, the interest on offer is 6.2-6.8 per cent.
Senior citizens will get an additional 25 basis points (0.25 percentage point) interest on all tenors.
The minimum deposit amount for the cumulative option is Rs 20,000, while the figure goes up steeply to Rs 2 lakh for monthly payout deposits.
How the company has fared
LIC Housing Finance’s parameters have been in the slow lane for many years now. Thanks to high interest rates and slow economic growth in the pre-Covid era and the impact of the pandemic have meant that the company has grown at a modest pace since 2018.
– The loan portfolio has grown at a compounded annual growth rate (CAGR) of 11 per cent from 2018-2022 and was at Rs 251,120 crore by FY22
– The loan book has expanded further in Q1FY23 and stood at Rs 255,712 crore as of June 2022
– The net interest margin was at 2.54 per cent in Q1FY23 versus 2.2 per cent in Q1FY22
– Stage 3 EAD (exposure at default) was at 4.96 per cent versus 5.93 per cent as of June 2021
– The net NPA is still rather high at 3.72 per cent
– The weighted average cost of borrowing is low, at 6.7 per cent as of June 2022
– Collection efficiency is healthy at 99 per cent
Thus, except for the net NPA metric, the other parameters have shown improvement. While the company is slowly recovering from the Covid impact, it may not sport spectacular financials like some private sector peers do. But nonetheless, there is no cause for alarm from an overall company perspective and certainly nothing to worry about on the safety of deposits, more so given that it enjoys the highest credit rating.
What should investors do?
The interest rates on the cumulative and annual payout options are higher than the ones with monthly interest payouts. Specifically, the rates on two-year and three-year tenors are attractive, at 6.75 per cent and 6.95 per cent, respectively. These rates are higher than the rates offered by another lending giant, HDFC, by 10 basis points. It is higher than the rates offered by most large public-sector and private banks. If we compare the rates on a tenor of 35 months offered by Bajaj Finserv, they are the same as what LIC Housing Finance’s deposits offer for the three-year tenor. But for 36 months, Bajaj Finserv offers much higher rates.
LIC Housing Finance also offers higher rates than the NSC (national savings certificate) on the five-year tenor, at 6.95 per cent.
Deposit rates may head northwards in the next few months, especially in light of RBI’s recent rate hike and tight liquidity in the financial system.
Even so, LIC Housing Finance’s deposits are attractive on the two and three-year tenors. Investors can deploy a portion of their surplus in these deposits. Interest income is taxed at the slab applicable to you.