Many people may frown upon seeing the name! There is nothing wrong with that! Money earned by working hard is no longer a matter of adventure. However, if the fund gradually becomes prosperous at high interest rates, then it is nothing less than an adventure. In fact, in the low interest rate environment of the hall, people are turning away from bank fixed deposits and are leaning towards capital market instruments. They are even willing to take some risks to earn higher returns. This has given rise to the concept of adventure deposits. This could be the beginning of linking bank deposits with markets like mutual funds. This new investment product will provide higher returns to investors, although they will have to take some risks.
The purpose of Adventure Deposit is to provide loans to low-rated borrowers who do not have access to the bond market. In the current financial market, highly rated (AA or AAA) companies have easy access to loans, while BBB or BB-rated companies find it difficult to raise funds.
Companies that cannot raise money from the bond market rely on banks. Banks often provide collateral-backed loans, which means that the borrower has to pledge an asset. Like green bonds, banks now also accept green deposits, which are used to provide green debt funds. Adventure Deposit will combine all these features to create a new deposit product.
Higher returns on deposits will be available
These adventure deposits will offer higher returns to depositors. One-year deposits, which currently pay 5.85-6.6% interest, could be increased by 200 basis points, or 2%. This could result in interest rates ranging from 7.85% to 8.6%.
This is how the interest rate will be determined
Initially, the guaranteed return on the loan will be equal to the savings deposit rate until the deposit is redeemed.
The deposit rate will be determined based on a pre-determined formula after the loan is disbursed. Banks will charge a spread, including risk assessment and other costs, which is similar to the loan pricing based on the current MCLR (Marginal Cost of Funds Lending Rate). It will be revalued every three months depending on the performance of the loan pool.
Risk and Loss Sharing
If someone fails to repay some loans on time and the bank has to make arrangements for them, it may impact the overall interest received by the depositors. Adventure deposits may cause a slight loss to the depositors in this case. If the loans are waived, the returns of these depositors will be even lower. However, due to the diversification of loans, the probability of a pool of loans failing at the same time is low, so there is always hope for good returns.
Three principles of adventure deposits
– Deposits linked to specific loans: These deposits will be linked to a specific class of loans.
– Loan pooling: Loans will be pooled like asset securitization.
– Variable interest rates: The interest rate on the deposits will not be fixed, but will vary depending on the performance of the adventure loan pool, as is the case with floating rate bonds.
A win-win deal for all
– For banks: They will be able to raise more money, even if they have to bear the cost of high-value deposits. This will improve their overall performance.
– For low-rated borrowers: It will be cheaper than borrowing from non-banking financial companies (NBFCs) and fintech companies.
– For depositors: higher returns, while ensuring that sub-investment grade loans are also backed by collateral.
Read More –Post Office Offers Special Insurance Scheme for 50+ People! Apply Like This
The biggest challenge
A major challenge for such deposits is the need to remove deposit insurance coverage, as depositors are willing to take some risk in exchange for better returns.
However, this report is purely informational. Therefore, before making any investment decision, it is advisable to speak to a certified financial advisor. He or she will be able to tell you how much profit the Adventure Deposit can offer the investor!