The information provided are for general consumption only. Do not construe this as an offer/advice/research to buy/sell any securities
NBFC bonds, as the name suggests are issued by Non-banking Finance Companies (NBFCs). NBFCs have a similar lending business model like banks but unlike banks they resort to different methods of obtaining money . One of the methods is by issuing an NBFC bond. Retail investors and institutions can lend money to NBFCs by buying their bonds and receiving an attractive and regular interest payment until maturity and get the principal back at maturity.
NBFC bonds are bonds issued by NBFCs (Non Banking Financial Institutions). Some examples of NBFCs are Bajaj Finance Ltd., Shree Ram Finance Ltd.
NBFCs issue many types of bonds. NBFC with a tenure of less than 1 year are called Commercial Papers (CPs). Apart from CPs, NBFCs issue long term instruments like MLDs (Market Linked Debentures) or NCDs (Non Convertible Debentures)
NBFCs can issue bonds as well as fixed deposits (12-60 months).
As soon as one reads ‘fixed deposit,’ one thinks about the safety of capital it promises. But this safety is a default for banks (especially big banks like HDFC, SBI and the likes) and not fixed deposits of NBFCs. This is because the government insures bank FDs up to Rs. 5 lakh per individual. This insurance doesn’t extend to NBFCs. Additionally, NBFCs run a business that’s considered to be riskier than the business of banks.
Hence, NBFC bonds are safer than NBFC fixed deposits. Further, the tax treatment of bonds is better than FDs. If held for 3 years or more, you get the benefit of indexation.
Investors with a moderate risk appetite can invest in NBFC bonds. High rated NBFCs like HDFC Ltd. can provide safety of capital and regular interest payments through their bonds.
Taxation of interest of NBFC bonds: Interest earned from NBFC bonds is taxed as per your marginal income tax slab rate.
Taxation on capital gains of NBFC bonds: For listed SBI bonds, the long term (more than 36 months) capital gains tax rate is 10% and the short term (less than 36 months) capital gains tax is the investor’s marginal income tax slab rate. For unlisted Non Banking Financial Corporation bonds, the long term (more than 12 months) capital gains tax is 20% with indexation benefit and the short term (less than 12 months) capital gains tax is the investor’s marginal income tax slab rate.
The above taxation doesn’t apply if the NBFC bond is an MLD (market linked debenture)
NBFCs run a slightly riskier business than banks. While banks lend money to borrowers who have a history of timely loan repayments, NBFCs cater to lower rated borrowers. Hence, NBFC bonds are slightly riskier than bank bonds.
It is important to note that there are exceptions to this thumb rule. For example, a AAA-rated NBFC bond is safer than a BBB-rated private bank bond.
NBFC bonds have similar risks as other Types of Bonds. They are credit default risk, interest rate risk, reinvestment risk and liquidity risk. Among these, interest rate risk and liquidity risk can be eliminated by holding the bond until maturity. Credit default risk can be managed by investing in bonds issued by high rated NBFCs (like AAA and AA)
NBFC bonds are perfect for moderate risk investors seeking higher than FD return from debt instruments. The yield of NBFC bonds is higher than both NBFC fixed deposits and bank bonds. However, this also comes at a higher risk.
The best NBFC bonds for you may be different from the best NBFC bonds for someone else. Here’s how you can identify the best NBFC bonds.
By filtering in the above manner, you can find a list of the best NBFC bonds for your money.
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