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(Precious) Words of Wisdom : "Risk comes from not knowing what you’re doing." ~ Warren Buffett

NBFC investments are Risky... Look before you leap

Bank Fixed Deposits are preferred the most among the various investment alternatives. Safety and fixed assured returns are the key to this preference.

However, quite often greed overpowers us and we get attracted to products offering higher returns. Going by the economic truism — high returns, high risk — such promises of better returns than bank deposits compromise on the safety aspect. There have been many instances where the companies offering high returns on deposits have not only defaulted on paying this higher return, but also failed to return the principal amount.

Given the increased incidents of such nature, RBI has recently issued an advisory cautioning investors against dubious deposit schemes. As per the same, we should conduct a thorough due diligence before making such investments.


This 'regulatory' due diligence includes the following:
*  Check whether the company is registered with RBI
*  Check if it is specifically authorized by RBI to accept deposits from the public (list available on RBI's website)
*  The company should not appear in the list prohibited to accept deposits
*  RBI's authorization does not imply that it guarantees the NBFC's deposits
*  The Certificate of Registration issued by RBI should be displayed prominently on the company's website
*  At present the maximum interest rate that any NBFC can offer is 12.5% (the prevailing rate can be checked at RBI's website)
*  The company should issue proper receipt with all the details such as amount, maturity date, rate of interest, etc.
*  The receipt should be signed by company's authorized signatory

That apart you cannot ignore the 'fundamental' due diligence
*  Management's experience, credibility and reputation
*  What is the company's business? Is it speculative in nature?
*  Is it profitable?
*  Is the company's debt situation comfortable
*  Are all the profitability and balance sheet ratios well within the norms
*  Is the issue rated? Is it highly rated?  
*  How has been the experience of the past debt issues by the company
*  Defaults, if any in the past

You can consider investing ONLY when
a) the company is 'fundamentally' excellent
b) meets all the regulatory requirements and
c) you have the capacity to bear the 'higher' risk that such deposits entail.


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