NCD vs FD
In September 2026, a one-year fixed deposit at a large bank pays around 6.5-7%.
The risk, in one incident
In 2018, IL&FS, an infrastructure lender rated AAA weeks earlier, defaulted on its debt. Investors who had chased the extra 1-2% in its paper spent years in recovery queues.
“Secured” does not mean safe
One more word that does heavy lifting in NCD brochures: secured. A secured NCD means the company has pledged assets against the borrowing, so if it fails, debenture-holders have a claim on those assets ahead of unsecured lenders.
When an NCD is still worth it
I hold the view that they make sense under three conditions. The money is genuinely surplus, not your emergency fund or next year’s school fees.
In September 2026, a one-year fixed deposit at a large bank pays around 6.5-7%. In the same month, Muthoot Fincorp ran a public NCD issue aiming to raise Rs 700 crore, Muthoot Capital placed debentures privately at 9.25%, Shriram Finance allotted Rs 2,220 crore of its own paper, and Muthoot Capital was quoting 8.95% even on a plain corporate FD. That 2-2.5% gap between the FD and the NCD is not a free lunch someone forgot to eat. It is a price, and the thing being priced is you.
Most comparisons of NCDs and FDs stop at “NCDs pay more but are riskier”, which is true and useless. The useful question is what exactly you are being paid to carry, and whether you are built to carry it.
Side by side
| Bank FD | NCD | |
|---|---|---|
| You lend to | A bank, regulated by the RBI | A company, often an NBFC |
| Safety net | DICGC insurance up to Rs 5 lakh per bank | None. Secured NCDs have asset cover, that is all |
| Rate, Sep 2026 | ~6.5-7% | ~8.5-9.5% for A-rated NBFC paper |
| Exit early | Break it, lose ~1% of interest | Sell on the exchange, if someone is buying |
| Tax on interest | Slab rate | Slab rate |
| What can go wrong | The bank fails, a very rare event in India | The company delays, restructures, or defaults |
The risk, in one incident
In 2018, IL&FS, an infrastructure lender rated AAA weeks earlier, defaulted on its debt. Investors who had chased the extra 1-2% in its paper spent years in recovery queues. DHFL followed. Franklin Templeton’s debt funds gated. Every one of those issuers had offered “just 1.5% more than FD” right up until the extra yield turned out to be the market pricing a default nobody had announced yet.
This is what credit risk means in practice: not a slightly bumpier ride, but a small probability of a very bad outcome, concentrated in exactly the companies paying the most. The NBFC paying 9.5% pays it because banks will not lend to it cheaply enough. You are being offered the bank’s rejected customer.
“Secured” does not mean safe
One more word that does heavy lifting in NCD brochures: secured. A secured NCD means the company has pledged assets against the borrowing, so if it fails, debenture-holders have a claim on those assets ahead of unsecured lenders. That is better than nothing, but it is a queue position, not a guarantee. In a real default, recovery takes years, the assets turn out to be worth less than the loan book suggested, and holders of “secured” paper still take a haircut. Secured tells you where you stand in the queue; it says nothing about whether the queue gets paid.
When an NCD is still worth it
I am not against NCDs. I hold the view that they make sense under three conditions. The money is genuinely surplus, not your emergency fund or next year’s school fees. The issuer is one you have actually read about: its loan book, its bad-loan ratio, who owns it, not just the credit rating, which the IL&FS episode showed can be a lagging indicator. And the position is small enough that a default is an annoyance, not a life event. For me that means single-digit percentages of the debt portfolio, spread across issuers.
If those conditions do not hold, the FD is not the boring option. It is the correctly priced one.
Read: Bonds
The bond market’s oldest joke is that more return means more risk, so there is no free yield, only paid risk. NCD investors earn that extra 2% the way an insurance company earns premiums: most years it feels like free money, and then one year you find out exactly what you were being paid for.