[vaibhav_a_a]

Last Thursday, the RBI issued a ''cease and desist'' order against four NBFCs from ''sanctioning and disbursing'' loans. The central bank cited ''material supervisory concerns'' and that lenders had resorted to ''usurious pricing''. These four are :

• Asirvad Micro Finance Limited - subsidiary of mannpuram gold loans
• Arohan Financial Services Limited - a MFI
• DMI Finance Private Limited and - a fintech startup
• Navi Finserv Limited - also fintech, promoted by Sachin Bansal ex Flipkart

Impact -
- the Mannapuram stock corrected by 17% over two trading sessions
- Navi has had to withdraw their bond issuance worth 100 Cr for which retail bids were being accepted - they are busy reassuring investors that already issued bonds are safe and debt remains serviceable
- Arohan also has outstanding NCDs and unlisted share (not much information about those)
- DMI also has outstanding NCDs including 200 Mn USD to foreign investors back in 2020. Again, no news.

Navi was rated at ''A'' grade by Crisil with a stable outlook. Makes you wonder how much do rating agencies know, or perhaps they are right and I am overthinking this, but worth putting this out there for those of you who are thinking of investing in corporate bonds for passive income.

https://www.crisilratings.com/mnt/wi...RR_348903.html

[SmartCat]

Originally Posted by vaibhav_a_a

Navi was rated at ''A'' grade by Crisil with a stable outlook. Makes you wonder how much do rating agencies know

Crisil link you provided gives the rationale for the "A rating". This rating is actually one of the lowest investible rating for a bond. Most mutual funds will not touch A-rated bonds, except perhaps the credit risk funds. Even if they do invest, exposure will be kept to the minimum (say 1% or 2% of AUM).

If a bond issuer has poor financials and knows that Crisil will give a BBB or lower rating, they simply won't approach top tier credit rating agencies. They would go to tier 2 rating agencies like Brickworks and get an equivalent of A rating.

perhaps they are right and I am overthinking this, but worth putting this out there for

Credit rating is 'backward looking' and tells you that past financials have been good. It has low predictive nature. Crisil might downgrade a bond from A to BBB after an event. And RBI said the 4 NBFCs are not allowed to take in more clients. But they will continue to receive interest/principal from existing clients. So its a big negative for the equity shareholders (because it impacts future business).

those of you who are thinking of investing in corporate bonds for passive income.

Yeah. No point in sweating over extra 2% pa returns. The only corporate bonds worth investing is those from PSUs (quasi-sovereign). And that too via PSU & Banking mutual fund.

[whitewing]

Originally Posted by vaibhav_a_a

lenders had resorted to ''usurious pricing''.

Usurious and how!
Navi has said they have a spread of 14%! Add to that the bonds they have issued have a yield of ~10%. This would make their loans more expensive than credit card rates.

Not sure why any one would take a loan at these rates unless it was a bridge load for very short periods.

[vaibhav_a_a]

Originally Posted by whitewing

Not sure why anyone would take a loan at these rates unless it was a bridge load for very short periods.

True - they are competing with the moneylender we are used to seeing in movies. Typically they charge between 15-36%. Navi has admitted the highest interest rate of 45% on their website!

[KrisTvpm]

Originally Posted by whitewing

Usurious and how!
Navi has said they have a spread of 14%! Add to that the bonds they have issued have a yield of ~10%. This would make their loans more expensive than credit card rates.

Not sure why any one would take a loan at these rates unless it was a bridge load for very short periods.

Guess therein lies the problem. Normally banks/credit card co's lend only to "credit-worthy" customers, whereas these NBFCs will lend money to people not fitting that criterion too, ofcourse at the expense of very tight collateral. Hence such people are "forced" to approach these outrightly filthy interest charging co's?

[SmartCat]

Originally Posted by KrisTvpm

Guess therein lies the problem. Normally banks/credit card co's lend only to "credit-worthy" customers, whereas these NBFCs will lend money to people not fitting that criterion too, ofcourse at the expense of very tight collateral. Hence such people are "forced" to approach these outrightly filthy interest charging co's?

- Credit cards are mostly given to banking customers, so they do have a better idea about cash inflows/outflows of a customer. Unlike these personal loan or micro finance companies who don't have much idea about customer's transactions.

- Cost of funds for a bank is very low compared to cost of funds for these small loan NBFCs. They have to raise funds from the markets or from banks themselves, and offer loans at higher rate.

- Recovery costs of small loan NBFCs is significantly higher than a car loan or home loan company, simply because of large volume of small ticket loans. You will notice that these small loan NBFCs have a large number of employees, compared to its size.

- These small loan NBFCs might have a spread of 14% one year, 3% the next year and -5% the next, especially if there is some kind of economic crisis (like Covid Years). So these companies keep a larger spread when times are good, to tide over bad times.

However, these small loan NBFCs do have access to CIBIL scores. Those with good scores will get loans at 15% pa while those with poor scores get charged a much higher rate.

[deepak_misra]

Originally Posted by vaibhav_a_a

Navi was rated at ''A'' grade by Crisil with a stable outlook. Makes you wonder how much do rating agencies know, or perhaps they are right and I am overthinking this, but worth putting this out there for those of you who are thinking of investing in corporate bonds for passive income.

https://www.crisilratings.com/mnt/wi...RR_348903.html

UTI short duration fund was a very safe fund and had suddenly invested a lot in DHFL bonds. I dont remember the DHFL rating but it was high.
DHFL suddenly defaulted shortly after the purchase. This is one of the cases where people (including myself and my financial advisor) lost money on a safe debt fund
Moral of the story: Dont assume debt fund are safe and ratings are infallible

[SmartCat]

Originally Posted by deepak_misra

UTI short duration fund was a very safe fund

Among debt mutual funds, it is best to invest in just:

- Liquid Fund
- Banking & PSU Debt Funds
- Gilt Funds

Ignore the rest. It is not worth the trouble.

This is one of the cases where people (including myself and my financial advisor) lost money on a safe debt fund. Moral of the story: Dont assume debt fund are safe and ratings are infallible

This is only half the story. If you have lost money, you made a mistake and your financial advisor gave you wrong advise.

- Whenever there is a big default in a debt MF bond portfolio, the NAV will crash (blue line), as seen in your UTI short duration fund.



- However, we need to understand the difference between a BOND and CORPORATE DEPOSIT. Bond holders have the first right over the assets. Once DHFL went to bankruptcy court, the assets were sold and bond holders are repaid first. Only what is left over went to DHFL corporate FD investors.

- So all you had to do was, hold on to the debt mutual fund whose NAV has crashed. As you can see, the NAV eventually recovered. The spikes in NAV (blue line) shows the inflows from DHFL. At the end of the day, UTI short duration fund offered slightly below category average returns (brown line)



(modified) Moral of the story: Do not exit a debt MF whenever there is a NAV crash!

[vaibhav_a_a]

Originally Posted by deepak_misra

DHFL suddenly defaulted shortly after the purchase. This is one of the cases where people (including myself and my financial advisor) lost money on a safe debt fund

Originally Posted by SmartCat

Bondholders have the first right over the assets[/i][/b]. Once DHFL went to bankruptcy court, the assets were sold and bond holders are repaid first.

Good advice re NAV correction but a bit more context re Bond repayment.

''All Bondholders are equal, but some are more equal than others'' (Animal farm, anyone?)

Secured bondholders (of which there are categories) get paid first. Here's the broad hierarchy for corporate bonds -

Senior Secured - this is Navi and many others, typically you'll find NBFCs here.
Sub Tier 1
Sub Tier 2 - Upper
Sub Tier 3
Perpetual - usually banks, also irredemable, I know little about it and no plan to know more either as I will die before bond matures so I don't want to buy this.
AT-1 - this is debt issued per Basel norms. If you recall Yes Bank, this was their debt tier. Again, safe if the bank is, but limited advantage and also long horizon so not buying
Sub Tier- 2 - This is unsecured, usually - hence not buying

Govt bonds of course depend on the guarantor - Union-issued bonds (GoI) are safer than state level and for each state you have to evaluate the state's credit situation (RBI publishes an excellent state debt to GSDP framework and situation analysis. e.g. Maha, Guj good. Kerala not so much, etc.)

It's important to know this hierarchy when investing directly into corporate bonds.

Anyway, I think Navi may just recover given its other business; it will take many months. p.s. Piramal Housing purchased DHFL debt and retained the AA rating. It was labeled and was available in the secondary market until last year. Despite a double-digit yield, I didn't touch it.

[Maverick Avi]

Originally Posted by SmartCat

Among debt mutual funds, it is best to invest in just:

- Liquid Fund
- Banking & PSU Debt Funds
- Gilt Funds

Ignore the rest. It is not worth the trouble.

How about overnight funds? I thought these were the safest.

[SmartCat]

Originally Posted by Maverick Avi

How about overnight funds? I thought these were the safest.

Overnight funds are indeed safest of the lot, but have historically offered 0.5% pa lower returns than liquid funds. If anybody wants their NAV to march forward every single day, come rain or sunshine, overnight funds is the way to go.

Liquid funds too have negligible credit risk or interest rate risk. But ironically, liquid funds have something called the "liquidity risk". If liquid funds sees sudden huge redemptions because of some kind of financial event, the fund manager will not get the best price when exiting securities. Because of which there might be a minor drop in NAV (rare event)

However, SEBI has tweaked the rules to make liquid funds even safer. Now all liquid funds have 20% of AUM in treasury bills or overnight securities. Fund managers can sell these securities to take care of sudden redemptions
https://economictimes.indiatimes.com...0.cms?from=mdr

Because of these additional safety measures, extra 0.5% pa returns of liquid funds is worth taking the slightly higher risk. During Covid panic, all liquid fund NAVs escaped unscathed (typically just 0.15% drop in NAV over a week during the worst period).

[kavensri]

Sorry to ask this question. I keep reading messages about Liquid Funds and why they are better than FDs.
But if I look into some of the top Liquid Funds and see the returns (last 3 years), they all range from 5-6.5% max. But the returns from FDs are more than 7% now.
So, my question is, if one is not paying IT on FD returns, can I say FDs are better than Liquid Funds? Or, am I missing very basic thing with my understanding?

[SmartCat]

Originally Posted by kavensri

But if I look into some of the top Liquid Funds and see the returns (last 3 years), they all range from 5-6.5% max. But the returns from FDs are more than 7% now. Or, am I missing very basic thing with my understanding?

The basic thing you are missing here is that you are comparing current returns of Fixed Deposit to past returns of Liquid Funds. Past returns of liquid funds have to be compared to with past returns of Fixed Deposits.

I don't have 1 Yr SBI FD chart, so we will make do with 5 year chart till 2021:



Now, if FD is offering 7% and you want to see how much debt funds is likely to offer, you have to look at a metric called 'yield to maturity'.



Current "yield to maturity" of liquid funds is 7% pa. Even in the past year, they have returned around 7% pa. Historically, liquid funds have returned an equivalent of 1 year FD.

But this is just one part of the story. Read the first 3 or 4 pages of this thread to understand every metric that is there on the above screenshot.

So, my question is, if one is not paying IT on FD returns, can I say FDs are better than Liquid Funds?

FDs are not "better" nor do they give higher returns than debt MFs, but is simpler.

[sukhbirST]

Originally Posted by kavensri

Sorry to ask this question. I keep reading messages about Liquid Funds and why they are better than FDs.......
..... Or, am I missing very basic thing with my understanding?

You need to understand your requirement in future also. FD can be better till a certain amount as after this you need to file I Tax. (Interest is high) New tax regime does not allow tax rebate like sec 80TTA.
Also a little bit of research on FDs like offers on 400 days, 2yr 11months is needed. If things don't match your future requirements liquid funds are better.
I do both, whichever suits my future need. Tax efficiency is the key here. Both cases - Nil tax paying for ex Spouse.

[Fx14]

Originally Posted by kavensri

I keep reading messages about Liquid Funds and why they are better than FDs.
But if I look into some of the top Liquid Funds and see the returns (last 3 years), they all range from 5-6.5% max. But the returns from FDs are more than 7% now.
Or, am I missing very basic thing with my understanding?

Few additional points to the posts already replying to your queries, for other perspectives to enhance your understanding :

1. For your first point, a better rephrasing of the statement would be "Debt" Funds and why they are better than FDs. You need to compare an appropriate Debt fund category to the corresponding FD tenure.

2. Note that Liquid Funds are mandated to hold investments with maturity not exceeding 91 days. So an appropriate FD tenure (if you do want to compare) should be the 3 month FD - which was nowhere near the 7% quoted.

3. Apart from the first 7 days, there is no penalty (exit load) for withdrawal from a Liquid Fund at any time. In contrast, a FD withdrawal at any time prior to it's maturity date attracts a dual penalty of a reduced interest rate (as applicable for the actual period FD was held) in addition to a premature penalty charge.

So, if you don't want the funds within the first 7 days, but unsure of when you will need to withdraw, Liquid Funds are better than FD.

Another perspective - Overnight and Liquid Funds are better compared to your Savings account rather than a FD.