Bank savings, Bank FD, or Corporate FD – Which is better from the liquidity viewpoint?

Bank savings, Bank FD, or Corporate FD

With the government pushing for banking inclusion throughout the country, almost every Indian has a savings bank account. It has become one of the essential requirements today because the government credits all subsidies to the individual’s savings account digitally. The days of doling out cash incentives and subsidy disbursal through checks have been dispensed altogether.
Banks are also soliciting new customers and encouraging them to open savings accounts. The RBI has also freed the interest regime allowing banks to offer the best savings interest rates they can afford. So, banks are providing interest at 4% to 7.1% on daily balances. Here is a list of the top Indian banks and the savings interest rates on savings accounts.

  1. State Bank of India – 2.70%
  2. DBS Digibank – 3.00% to 4.00%
  3. Yes Bank – 4.00% to 5.00%
  4. Standard Chartered Bank – 2.75% onwards
  5. RBL Bank – 4.25% to 6.00%

While the SBI savings accounts rate is amongst the lowest in the country, private banks like RBL Bank offer higher rates. Even the FD rates offered by these top banks in India do not cross 7% per annum. Under such circumstances, people wonder whether it is beneficial to have a savings account in a bank or invest their hard-earned money in investment companies that generally promise higher returns consistently. Any person who gives tips on finances will advise that investing in a corporate FD is better than a bank FD.
So, let us compare a bank FD with a corporate FD and learn the difference.

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Corporate FD – Features

  • Contrary to what many people think, corporate FDs are secure because credit rating agencies like ICRA and CRISIL rate them on various parameters. Therefore, investors can study these parameters and make decisions accordingly.
  • Corporate FDs provide multiple interest payout options, like cumulative and non-cumulative.
  • Corporates offer premature withdrawals on their deposits without restrictions.
  • Investors can decide the deposit tenure.
  • As corporates do not depend on market forces to decide the interest rates, the risk involved in such instruments is comparatively lower. But, the bank FD is any day, a safer investment.
  • The interest offered by corporates on their FDs is consistently higher than the bank FD rate.
Here are some features of bank FDs
  • Banks also offer cumulative and non-cumulative deposits.
  • Bank FD also allows premature withdrawal but is subject to specific conditions like a penalty.

Which of the two is better?

We shall look at various parameters as follows.
  1. Rate of Interest – Corporate FDs are better because they offer higher interest rates on their FDs.
  2. Risk Factor – The bank FD is the safest investment because the government guarantees its repayment. The bank deposits are insured up to a specific ceiling. Today, it is Rs 5 lakhs, including the principal and the interest. Corporate FDs do not have such backing. Therefore, the bank FDs are better from the risk point of view.
  3. Loan Availability – The bank deposits are better because they offer loan facilities up to 90% of the FD amount, whereas the corporate FDs do not provide loans against their security.
  4. TDS – Corporates deduct TDS on the interest portion if it is more than Rs 5000 a year. The banks also deduct TDS, but the threshold is higher at Rs 40,000.
Thus, we can see that corporates offer better returns on investment. However, the bank FDs are better in almost all other aspects. So, if you are looking for returns, the corporate FD is a better option. On the other hand, if the safety of your investment is paramount, the bank FD is better. However, the top corporate FDs are also considered equally safe.

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Is a bank FD better than a bank savings account?

The primary benefit of a savings account is its liquidity. You can withdraw the amount anytime you want. That is not the case with the bank of the corporate FD. Therefore, you have to follow a specific procedure for withdrawing these deposits, even prematurely.

So, the bank savings account is better than its FD and the corporate deposits from the liquidity angle. Nevertheless, bank FDs and corporate FDs are also liquid but do not match the liquidity of the savings account. Secondly, the savings account is a running account, whereas the bank and corporate FDs are static.

So, the bank savings account is a better option if we consider these criteria. Otherwise, from the returns viewpoint, the bank savings accounts are the worst of the three because of the low savings interest rate offered by banks.