Thursday 28 Mar 2024
By
main news image

This article first appeared in Personal Wealth, The Edge Malaysia Weekly on September 25, 2017 - October 1, 2017

What are R-NIDs?

Negotiable Instruments of Deposit (NIDs) are deposit certificates used in the wholesale money market that are regularly purchased and traded by institutional investors and high-net-worth individuals in the stock market. 

Retail NIDs (R-NIDs) work like fixed deposits, where investors have the choice of depositing their money for a fixed period of time to generate a higher interest rate than those offered by banks for fixed deposits. Retail investors are individuals and eligible small and medium enterprises. 

Bank Negara Malaysia introduced the R-NID so that retail investors can have another savings option while banks can have an additional source of capital to help them better manage their liquidity profiles. 

 

Features

Participating banks are allowed to offer R-NIDs with maturities of up to five years to retail investors, says Bank Negara. The minimum investment amount for regular NIDs is RM60,000, but the minimum investment amount for R-NIDs is only RM10,000.  

While no benchmarks have been set in terms of interest rates, participating banks could offer an interest rate of 4% to 4.5% for R-NIDs, compared with the average rate of 3% for fixed deposits. 

Another interesting feature is the flexibility given to investors to sell their R-NIDs to the issuing bank before their maturity. There is no penalty imposed on the accrued interest, unlike fixed deposits, where an early withdrawal usually results in a loss of at least 50% of the accrued interest.     

Public Bank Bhd’s R-NID has a predetermined maturity of 15 months at an interest rate of 4%. Affin Bank and Kenanga Investment Bank offer R-NIDs with maturities of one month to five years, with interest rates of 3% to 4.1%. According to Bank Negara, Alliance Bank, CIMB Bank and RHB Bank are expected to roll out their R-NID programmes in the near future. 

 

Risks

Like all investments, R-NIDs come with risks, namely interest rate risk and credit risk of the issuing bank. Similar to bonds, the market value of R-NIDs increases when the interest rate falls, which results in a capital gain for investors if they decide to sell their R-NIDs at that point. Likewise, the market value of R-NIDs decreases when interest rates go up. 

With regards to interest rate risk, investors should take note that the market value of longer-tenured R-NIDs is more sensitive to changes in interest rates compared with shorter-tenured ones. For example, compared with a one-year R-NID, a five-year R-NID would see a larger gain or loss in market value when interest rates change.

From a credit risk perspective, investors need to be mindful that the value of their R-NIDs may be negatively affected should the issuing bank face trouble as R-NIDs are not covered by the Perbadanan Insurans Deposit Malaysia (PIDM) scheme, which insures normal deposits in the event of a bank failure.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.

      Print
      Text Size
      Share