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  4. How to know if your fixed deposit is in safe hands?

How to know if your fixed deposit is in safe hands?

With the current economic scenario revealing financial fault lines, the prospects of an institution defaulting on your fixed deposit, have become very real. Instances of crisis aren’t something to take lightly and even if you are a retail FD investor, you should thoroughly assess the institution you’ve partnered with.

India TV Business Desk Reported by: India TV Business Desk
New Delhi Updated on: March 24, 2020 10:26 IST
How to know if your fixed deposit is in safe hands?

How to know if your fixed deposit is in safe hands?

With the current economic scenario revealing financial fault lines, the prospects of an institution defaulting on your fixed deposit, have become very real. Instances of crisis aren’t something to take lightly and even if you are a retail FD investor, you should thoroughly assess the institution you’ve partnered with. 
 
The first step here is to follow the news related to financial institutions, their corporate governance, and take note of any discrepancies brought to light by auditors. These are forewarnings of potential risk, especially if the institution in question hasn’t shared earnings on time. However, as such irregularities, though brought up by the news, can be tough to keep track of, you can turn to other methods to evaluate the institutions you have deposits with on a periodic basis. 
 
For a deeper understanding on what to look for, and how to spot the warnings signs, read on.
 
Monitor various financial operating parameters frequently 
For financial institutions, auditors periodically assess standings and submit detailed reports. In these, you’ll find information in the form of ratios that play a key role in identifying whether or not the entity is performing well. These are based on evaluations of the financial institution’s standalone performance, and in comparison to others in the industry. To get started, here are the 4 main categories to look into.
• Profitability ratios
• Growth ratios
• Asset quality ratios
• Capital adequacy ratios
Sometimes, even when you’re offered high FD rates for investing, you may need to thoroughly peruse the above-mentioned categories, before investing your hard-earned savings. 
 
Non-performing assets
Found under the asset quality umbrella, the gross non-performing assets (NPAs) of a financial institution refer to those loans that are in danger of not being repaid. However, in their books banks usually provide for some bad loans. Net non-performing assets are those bad loans that are in excess of this provision. So, this is a more accurate metric to consider. The lower the number, the better is the health of the institution.
 
Provision coverage ratio
The provision coverage ratio is linked to the NPAs as it sheds light on the portion of the profits set aside to handle bad loans. In this case, you should ensure that that the institution has a PCR of at least 70% or higher as this means that it isn’t vulnerable in the coming quarters. You get this figure by dividing the provision for NPAs by the Gross NPA.
 
Capital Adequacy Ratio (CAR)
This ratio is what you get when you evaluate the entity’s capital against its risk weighted assets. CAR is a measure of the institution’s ability to meet its obligations and continue to improve business or absorb losses without needing to dilute equity. For this reason, it is important to ensure that the FD issuer you’re dealing with has a high CAR, preferably over 18%.  
 
Return on assets (ROA) 
This parameter measures the returns a financial company earns on its assets and whether or not it is profitable when generating revenue. Naturally, here you must ensure that the ROA% isn’t in the red as this would mean negative earnings or no profits. ROA above 1.6% is ideal and a figure above 1.3% is considered good.
 
Net interest margin (NIM)
Simply put, the NIM for financial entities is the difference between the interest it earns on loans and the interest it pays on deposits, relative to its total assets. Monitoring this can be tricky, but a good rule to follow is to steer clear of a company with high NPAs and a low NIM. An NIM of 4% or more indicates good financial management. 
 
According to GuruFocus, a firm offering marketing insights, for the quarter ended in December 2019, Bajaj Finance maintained an annualised NIM (bank only) of 11.08%. This is one of the reasons why the Bajaj Finance Fixed Deposit a safe investment choice, for your savings. Moreover, you get assured returns and you can grow your investment by nearly 45%, by investing for 5 years, as a new customer. 
To help you get a clear picture of the earnings you can enjoy with this instrument, assume that you invest Rs. 5 lakh, Rs. 10 lakh or Rs. 20 lakh as a new customer for 5 years.
 
New customer
Investment amount  Tenor (In years) Interest rate Maturity Amount Growth of savings (in %)
Rs.5,00,000 5 7.80% Rs.7,27,887 45.57
Rs.10,00,000  7.80%  Rs.14,55,773 45.57
Rs.20,00,000  7.80%  Rs.29,11,547 45.57
 
 
• You earn interest of Rs.2,27,887 on Rs.5,00,000
• You earn interest of Rs.4,55,773 on Rs.10,00,000
• You earn interest of Rs.9,11,547 on Rs.20,00,000
 
The FD interest rates are higher for senior citizens, who can grow their savings by nearly 47%. To know how, check the table below:
 
Senior citizen
Investment amount Tenor (In years)  Interest rate Maturity Amount Growth of savings (in %)
Rs.5,00,000  5 8.05% Rs.7,36,366 47.27
Rs.10,00,000 5 8.05%  Rs.14,72,732  47.27
Rs.20,00,000 5 8.05% Rs.29,45,465 47.27
All the above results were generated using the FD calculator
 
• You earn interest of Rs.2,36,366 on Rs.5,00,000
• You earn interest of Rs.4,72,732 on Rs.10,00,000
• You earn interest of Rs.9,45,465 on Rs.20,00,000
 
In addition to offering generous returns, Bajaj Finance has also secured the highest stability ratings from CRISIL and ICRA. It has the CRISIL ‘FAAA’ and ICRA ‘MAAA’ ratings, indicating that it is in fact a stable and worthwhile option to consider, especially in the current scenario. With this instrument, you can invest flexibly, over a tenor of up to 60 months, and even opt for the Systematic Deposit Plan feature to get started through bite-sized contributions of Rs. 5,000 per month. Here each contribution is used to book a new fixed deposit at the prevailing FD interest rates on that day. You can make between 6 and 48 deposits and select a tenor of up to 5 years for them. Additionally, Bajaj Finance also offers the Auto-Renewal facility through which you can reinvest seamlessly without any extra effort. This also allows you enjoy FD renewal bonuses, currently a 0.10% interest rate hike. 
 
So, going forward, weigh the various ratios and parameters and pick an institution to grow your wealth with cautiously. To partner with Bajaj Finance, simply book a Bajaj Finance online FD today! 
(Disclaimer: The liability for the article solely rests with the author/brand. The content has not been created or verified by India TV channel and IndiaTVNews.com)