T-Bills, SDLs, NCDs: who are you lending to?.
Three fixed-income products on a single safety ladder — sovereign to corporate
Two IOUs in the same inbox — one with a credit rating that mattered
Meera's father retired with twenty years of savings in a bank FD. One afternoon a broker called with something that looked better: a company name he recognised from television, a glossy brochure, and a 12% annual return printed in large, confident type. He saw the brand, he saw the number, and he signed. The credit rating was on page 4, in text smaller than the footnotes. Two years later, the company missed its first payment.
A T-Bill is a short-term IOU from the Central Government of India. You buy it at a discount — below its ₹100 face value — and receive exactly ₹100 back when it matures. Three fixed tenures exist: 91 days, 182 days, and 364 days. There is no coupon payment along the way. The gap between what you paid and ₹100 is your entire return. You know exactly what you'll get and exactly when.
SDLs follow the same structure, but the borrower is a state government. Karnataka, Maharashtra, Gujarat — they all issue SDLs through RBI-managed auctions to fund their spending. Because states carry slightly more fiscal risk than the Centre, they offer a higher yield: typically 25 to 75 basis points above comparable central government securities of similar maturity. That is a small but real premium, and it reflects a small but real difference in risk.
An NCD is a corporate IOU. A company borrows from the public at a stated interest rate for a stated term, then repays. Interest is paid periodically — quarterly, half-yearly, or at maturity depending on the terms. The yield is noticeably higher than any government bond. But the borrower is now a company, not a government, and companies can run into trouble.
The safety ladder runs: Centre → State → Company. Every rung up adds yield and adds real credit risk. For NCDs, the credit rating is the single most important number on the document. A SEBI-registered agency assigns a score — AAA, AA, A, BBB — based on how likely the issuer is to repay. AAA signals very high confidence. BBB signals acceptable confidence with meaningful uncertainty. Higher yield almost always signals a lower rating. Never confuse a higher interest rate with generosity. It is a signal of risk.
Two shopkeepers, two very different IOUs
Imagine you have ₹10,000 to lend and two people are asking. The first is the government of India — it has the power to tax, it manages the currency, and it has never defaulted on a domestic obligation. The second is a local shopkeeper you know vaguely. He offers more interest because he has to attract lenders. In a good year, both pay you back. In a bad year, the government always pays. The shopkeeper might not. T-Bills and SDLs are loans to the government. NCDs are loans to the shopkeeper.
Why this matters
If you need money within a year, T-Bills offer near-sovereign certainty with no lock-in risk. Bank FDs are insured by DICGC up to ₹5 lakh per depositor per bank — but T-Bills and SDLs are direct sovereign obligations with no such ceiling. SDLs suit two-to-five-year horizons — better yield, still backed by a state. NCDs belong in your portfolio only after you've read the credit rating and understood the issuer's finances. Any resident Indian can access T-Bills and SDLs directly through RBI Retail Direct with a minimum of ₹10,000 at face value — no broker needed. For NCDs, check the rating first. Check the yield second.
The credit rating is the only line that counts.
Where people go wrong
- Buying an NCD because the brand name is familiarBrand recognition and creditworthiness are separate things. A well-known company can carry an A or lower rating, which means real default risk — the name on the brochure does not guarantee the payment.
- Assuming listed NCDs are as liquid as stocksNCDs trade on BSE and NSE, but volumes are often thin. Wide bid-ask spreads on the secondary market can make an early exit expensive — sometimes costlier than the interest advantage you were chasing.
- Ignoring tax before comparing NCD yields to SDLsA 9% NCD at a 30% tax slab nets roughly 6.3% after tax. That can be lower than an SDL at 7.5%. Always compute the post-tax return before comparing any two fixed-income products.
- Treating SDL safety as identical to a T-BillStates manage their own finances and can face fiscal stress. SDL defaults are extremely rare, but a T-Bill carries the full backing of the sovereign. The safety is close — not identical.
T-Bills and SDLs carry sovereign or near-sovereign backing — no credit risk, only interest rate risk.
For NCDs, the credit rating matters more than the yield headline or the company's brand name.
Tax significantly erodes NCD yields at higher slabs — always compute post-tax return before comparing.
The brain anchors on the first number it reads. A 12% headline yield registers before the 'AA-rated' line below it even comes into focus. That sequencing is not accidental — it is how the product is designed to be seen.