Define Non-Negotiable Securities

Deposits

Deposits earn fixed rate of return. Even though bank deposits resemble fixed income securities they are not negotiable instruments. Some of the deposits are dealt subsequently.

a) Bank Deposits

It is the simple investment avenue open for the investors. He has to open an account and deposit the money. Traditionally the banks offered current account, savings account and fixed deposit account. Current account does not offer any interest rate. The drawback of having large amounts in savings accounts is that the return is just 4.5 per cent. The savings account interest rate is regulated by the Reserve Bank of India and kept low because of the high cost of servicing them. The savings account is more liquid and convenient to handle. The fixed account carries high interest rate and the money is locked up for a fixed period. With increasing competition among the banks, the banks have bundled the plain savings account with the fixed account to cater to the needs of the small savers. Some of the hybrid accounts are given below in the Table.

Hybrid Accounts Offered by Some Banks

The deposits in the banks are considered to be safe because of the RBI regulation.

The risk averse investors prefer the bank deposits.

b) Post Office Deposits

Like the banks, post office also offers fixed deposit facility and monthly income scheme. Post office Monthly Income Scheme is a popular scheme for the retired. An interest rate of 13% is paid monthly. The term of the scheme is 6 years, at the end of which a bonus of 10% is paid. The annualised yield to maturity works out to be 15.01% per annum. After three years, premature closure is allowed without any penalty. If the closure is after one year, a penalty of 5% is charged.

c)  NBFC Deposits

In recent years, there has been a significant increase in the importance of non-banking financial companies in the process of financial intermediation. The NBFC comes under the purview of the RBJ. The amendment of RBI Act in Jan 1997, made registration compulsory for the NBFCs.

Period The maturity period ranges from few months to five years. It varies from company to company. For example, the Birla Global Finance, the company belonging to Aditya Birla group accepts deposits with maturity from 3-5 years.

Maximum Limit The limit for acceptance of deposit has been based on the credit rating of the company. The NBFCs not having net owned funds of ` 25 lakh are not entitled to accept deposits.

Internet NBFCs offer interest rate higher than the commercial bank on public deposit. The interest rate differs according to maturity period. There is a disparity in the interest rate among the companies in accordance with the credit ratings and policies of the companies. Even the companies with similar credit ratings provide different interest rates for their deposits. Generally, companies with lower credit ratings offer higher interest rates to cover the risk. The following Table shows the interest rates offered by some of the finance companies as on July 2004.

Security Security of the deposits of the NBFCs is much lower than the deposits with banks. To improve the liquidity of NBFCs the percentage of liquid assets required to be maintained by them has been enhanced from 12.5 percent to 15 percent with effect from April 1999 respectively. Company Law Board is authorised to direct the defaulting NBFCs to repay the deposits. In spite of the strict rules and regulations laid down by RBI the default rate is high in the case of NBFCs.