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Thu 27 Jun 2019 03:11 PM

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Multinationals tell Indian units to avoid mutual funds, non-banking financials

There is growing concern after a number of large scale companies in India have gone bust

Multinationals tell Indian units to avoid mutual funds, non-banking financials

A number of multinational companies are understood to have advised their India-based subsidiaries to park surplus funds in bank fixed deposits (FDs) and avoid mutual funds or non-banking financial companies (NBFCs), amid growing concerns regarding impending large-scale defaults by companies in India’s shadow banking sector.

The advice has come from the headquarters of a number of multinational companies in India, according to sources in these companies.

“There is panic talk of many more NBFC’s going bust in the near term, and we have been advised by our global HQ to shift our surplus investment to bank FDs,” said the financial director of the Indian arm of a multinational chemical company, who asked not to be named.

“We have already shifted 40 to 50 percent of our surplus funds to FDs in various banks in India,” he added.

Senior finance executives in several other MNC units in India have also admitted to shifting surplus investible funds to bank FDs from various market instruments in which they had previously been held.

The sudden rush of large-scale deposits by multinational companies units has had a negative impact on a number of banks, who have responded by offering reduced rates of interests on such deposits.

“The interest rates offered on such FDs (by multinationals) are one to 1.5 percent less than what is offered to our retail FD customers,” a senior executive at New Delhi-based PSU bank said.

Fixed deposits in Indian banks currently carry interest rates of between 6.7 and 7 percent.

Banking executives have told Arabian Business that the interest rate offered on FDs by multinationals in India also depends on their commitment to fixed terms.

“Companies which commit to fixed periods for holding their fixed deposits with us are offered comparatively higher interest rates than those who do not make such commitments,” a senior executive at a private bank said.

Last September, panic gripped India’s financial market when leading infrastructure company IL&FS went bust, with large scale debt payment defaults.

The situation has persisted as other companies – including housing finance company Diwan Housing Finance Corporation and a number Reliance Capital subsidiaries – defaulted on payments.

“The payment crises has spread to India’s thriving mutual fund industry, with many of them holding large investments in the debt instruments of many of these and other NBFCs which are also said to be facing acute liquidity issues for servicing the debt,” financial consultant MR Rajaram said.

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