Corporate FDs: What the Extra 2% Is Actually Telling You

The leaflet at Girish’s bank branch — placed, note, inside a bank — offered a “corporate FD” at 9.1% when the bank’s own board said 7%. Same word, FD. Same-looking form. Girish moved ₹10 lakh for the extra 2%, because 2% is 2%. What he actually did was exit a government-insured deposit and lend his retirement money, unsecured, to a private company — for the price of a restaurant bill a month.

The machinery: the extra 2% is the risk report

Companies borrow from the public at 8.5–10% for one reason: banks would charge them more, or lend them less. The extra yield is not generosity; it is the market’s written estimate of the chance you do not get everything back. Bank FDs carry DICGC insurance up to ₹5 lakh and a regulator that shuts banks slowly and mergers them loudly. Corporate FDs carry a credit rating — an opinion, revisable in one press release — and a queue: in a collapse, secured lenders eat first, and “fixed deposit holders” discover what unsecured means. DHFL’s depositors, many of them retirees who chose it for exactly this extra 2%, learned the vocabulary in court.

The asymmetry, priced

On ₹10 lakh for 3 years, 8.5% instead of 7% earns you about ₹52,000 extra — before slab tax shaves it to ₹35-odd thousand. Against that: a single default can impair lakhs, with recovery measured in years and paise-per-rupee. You are selling insurance on a company’s solvency for ₹1,000 a month, without reading the policy.

Where the selling gets grey

Distributors earn commission on corporate FDs — often meaningfully more than on bank deposits, which is why the leaflet found its way to the branch counter and why the word “FD” is doing the costume work. Ratings in the brochure may be for a different instrument of the same group; “AAA” on the cover can be “AA-” on your specific deposit. And the highest rates cluster, always, in the companies that need your money most.

Run your own numbers, right here

How to protect yourself

Rule one: money whose loss you cannot absorb does not chase yield — it stays within insured limits, laddered across banks if needed. If you do lend to companies, cap it at a small slice of your fixed-income money, only AAA from boring, systemically-watched issuers, spread across names, with maturities you can outwait. And always compute the actual rupee difference first, after tax, in the calculator above — the “extra 2%” usually shrinks to a number too small to be worth meeting a lawyer over.

The company is famous and advertises on TV. Safe?

Advertising budgets are not collateral. Several of India’s loudest borrowers defaulted with their hoardings still lit. Fame is a marketing metric, not a credit rating.

What about NBFC FDs with “AAA”?

Better than unrated — and still unsecured, still uninsured, still an opinion. The rating agencies’ record on downgrading in time is, being generous, mixed. Size your exposure to the worst quarter, not the brochure.

Disclaimer: This article is for general information only and is not financial or tax advice. Consult a qualified advisor before making investment or tax decisions.