A check at few private and public sector banks revealed that they haven’t seen a significant interest from consumers for this product. Several financial planners and distributors that dna of money spoke to, said that there is absolutely no investor enthusiasm for IIBs.
Ram Sangapure, general manager (retail) with the Central Bank of India accepted the fact that there hasn’t been much investor interest so far. “The level of awareness is very low and that is why we haven’t received too many enquiries for the product. This is because for people who are in the higher tax bracket and are aware don’t get very good post tax returns on this product so they are not interested. On the other hand, for those in the low tax bracket, it makes sense to invest but they are not aware about it,” he explained.
The rate of interest on CPI-linked IIBs will be the inflation rate plus a fixed rate, which is going to be 1.5%. Now, the CPI used in this case will come with a lag of three months. For example, September’s CPI has been used as the reference point for December 2013 issue.
Assuming that you are in the highest tax bracket (30%) and the interest rate applicable is 11.5% (10% CPI + 1.5% fixed rate), the post-tax returns work out to 8.17% against the Sept. CPI of 9.84%.
For someone in the 20% tax bracket, the post-tax returns will be 9.39% and for those in the lowest tax bracket the post tax returns would work out to be 10.6%.
The consumer price inflation for the month of November was 11.24%. Therefore in the current scenario, neither of the cases the returns appear to beat inflation.
“The level of awareness amongst bank employees also seemed to be very less. The bank employees that I was interacting with weren’t very well versed with the contours of the product”, said a financial planner who had approached a bank to enquire about IIBs.
Bankers also agreed that they are not marketing the products aggressively. This is not surprising considering that they have not been incentivised enough. RBI pays a nominal amount to banks for the sale of IIBs, this is way lower than the 1-5% that is paid by insurance companies as commission, explain bankers. Not surprisingly then, Ulips and other life insurance products are offered as the top investment options by relationship managers in all banks.
Moreover, so far IIBs are being touted as a replacement to fixed deposits as an investment option.
If banks begin to push IIBs instead of FDs then it will end up hurting their deposit, say experts.
Arun Kaul, CMD, UCO Bank also explained that the complete lack of interest from investors is also because this government-backed security has a floating rate of interest. “Retail investors want certainty, they don’t want products where the interest rates can change as is the case here where the rates will get revised as per the CPI,” he explained.
Lack of any tax advantage is yet another reason that this product has failed to make a mark. Moreover, even without any real income, there will be tax outgo on CPI-linked IIBs every year, says Harsh Roongta, CEO of apnapaisa.com.
Apart from this there are several operational challenges that are proving to be a hindrance. For instance, you need to open a bond ledger account, pay fine for early redemptions etc.
In a bid to increase off take, RBI has increased the deadline for IIBs from December 31st to March 31st 2014. But financial experts believe that it is unlikely that the product will take off even with an extended deadline.