Corporate FDs: what the extra 2% is actually paying you for
A 9% company deposit against a 7% bank deposit is not free money. It is unsecured lending with no deposit insurance, and the history of what happens when it goes wrong.
When banks pay 7% and an NBFC advertises 9%, the two-point gap looks like a free upgrade. It is not free. It is the market's assessment of how much more likely the company is to fail than the bank is, and the market is generally right about that.
Whether that is a good trade depends on facts most depositors never check.
What you are actually buying
A bank fixed deposit is a deposit with a regulated bank, insured by the DICGC up to ₹5 lakh per depositor per bank, covering principal and interest together. Below that ceiling, the government stands behind it.
A corporate fixed deposit is an unsecured loan to a company. There is no insurance of any kind. If the company cannot pay, you join the queue of unsecured creditors — behind secured lenders, behind banks, behind statutory dues, behind employee claims. Historically, unsecured creditors in Indian insolvency proceedings recover a small fraction of what they are owed, and they wait years to find out how small.
This is not hypothetical. Depositors in a number of Indian NBFCs and housing finance companies over the last decade have discovered exactly this. Some recovered a partial amount after multi-year resolution processes. Some recovered very little.
Pricing the extra 2%
Put a number on it. ₹5 lakh for three years:
- Bank FD at 7%, quarterly compounding: matures at about ₹6.16 lakh. Interest ₹1.16 lakh.
- Corporate FD at 9%: matures at about ₹6.53 lakh. Interest ₹1.53 lakh.
The extra is about ₹37,000 over three years — roughly ₹1,000 a month.
Now the other side. The downside is not "a slightly lower return". It is the loss of ₹5 lakh of principal. You are accepting a small chance of losing ₹5 lakh in exchange for a certain ₹37,000.
For that to be worth it, your assessment of default probability over three years has to be very low indeed — well under 1%. For a AAA-rated deposit from a large, well-capitalised NBFC, that may be reasonable. For an AA or unrated deposit from a company you had not heard of before the advertisement, it is not.
Read the rating, and read it properly
Corporate deposits carry ratings from CRISIL, ICRA, CARE or India Ratings. The rating is the single most useful thing on the page.
- AAA — highest safety. Default risk is genuinely low.
- AA — high safety, one notch down. Materially riskier than it sounds.
- A — adequate safety. This is where the promised rates start looking attractive, which is not a coincidence.
- BBB and below — speculative. Do not.
Two things matter as much as the letter. The outlook — a AAA on negative watch is a different proposition from a stable one. And the trajectory — a company recently downgraded from AAA to AA is more concerning than one that has sat at AA for a decade, because the direction carries information.
Ratings are also lagging indicators. Agencies downgrade after deterioration is visible, not before. A AAA rating on the day you deposit is not a guarantee for the next three years, and deposits are not tradeable, so you cannot exit on a downgrade the way a bondholder can.
Beyond the rating
Who owns it. A deposit-taking NBFC with a large, well-capitalised parent is a materially different risk from a standalone one. The parent has both the means and the reputational reason to support it.
What they lend against. A company lending against gold or property with conservative loan-to-value ratios is safer than one doing unsecured personal loans at scale. Read what the business actually does.
Whether the company needs your money. A well-funded NBFC with cheap bank lines does not need to advertise 9% retail deposits. Companies pay above-market retail rates when cheaper wholesale funding has become harder to obtain — which is exactly the condition that precedes trouble. An unusually attractive rate is information, not an opportunity.
Liquidity terms. Most corporate FDs have a three-to-six-month lock-in with no premature withdrawal at all, then heavy penalties. Bank deposits break far more easily.
The rules worth keeping
AAA only, with a stable outlook.
Cap the exposure. Corporate deposits should be a small minority of your fixed-income allocation — 10% to 20% at most. Not the whole of it, and never the emergency fund.
Diversify across issuers. Three deposits of ₹2 lakh across three AAA issuers is a genuinely different risk profile from ₹6 lakh with one.
Keep the tenure short. One to two years rather than five. Credit quality is much easier to forecast over a short horizon, and it lets you reassess.
Never for money you need. A corporate deposit in trouble is not merely lower-yielding; it is inaccessible for years while the resolution runs.
The tax point that closes the argument
Corporate FD interest is taxed at your slab rate, exactly like a bank FD. TDS applies above ₹5,000 a year — a much lower threshold than the bank equivalent.
For a taxpayer in the 30% bracket, the real comparison is 6.3% net against 4.9% net. That is a 1.4-point advantage for accepting unsecured credit risk with no insurance and no liquidity.
Set against what else is available to that same taxpayer — VPF at 8.25% with the interest exempt within the ₹2.5 lakh threshold, or PPF at 7.1% entirely tax-free — the corporate deposit stops looking like the high-yield option at all. It is usually a worse trade than the tax-advantaged instruments the same person already has access to and has not filled.
Where these figures come from
- Reserve Bank of India — Policy rates, lending and deposit regulation, credit card rules
Published by FinClamp. This guide is information, not financial advice — see the disclaimer.