What Are Bank Debentures?
- To issue a debenture to an organization, the bank must submit an application along with the other required documents like a statement of profit and loss indicating the bad debt of the bank and statement showing previous loans taken by the bank to the Federal Reserve. The bank is required to sit out a waiting period before confirmation of approval is issued. On approval, the debentures are issued in accordance with the law to the debenture holder. The term of the debenture is also decided when it is issued and the bank is to repay the principal amount along with the fixed rate of interest at the end of this period.
- Despite both being debt instruments, and, therefore, having many similarities, debentures and bonds are not the same thing. While a bond guarantees security or collateral that the principal amount will be returned, a debenture will not have collateral attached to it. This means that there is no guarantee that the amount provided to the bank could not be given back. However, it is this added risk that ensures that an investor is pledged a higher interest rate on repayment.
- Once an investor lands a reliable bank to issue debenture, returns are guaranteed to the bank. Sadly, many frauds and scams have been carried out by many banks in the country. These banks provide guarantees issued by the leading banks of the country and assure investors of returns in short periods and multiplying value by trading many times. This is called a "roll program". The investor's money is then deposited into a foreign bank account and made inaccessible. Signing non-disclosure agreements with such banks on issue also means that the FBI cannot investigate into the matter.
- Never buy into middlemen who insist on you signing a deal right that very day lest the opportunity to make more money goes to another bidder. Investments always require thought and time, and anyone looking for an investor is aware of this fact. Asking questions is another way of escaping a scam. If the middleman says he's representing top banks of the world, find out names and addresses. Ask why they would be interested in your contribution. Remember, bank debentures usually deal in billions, not thousands. Still better, would be to call up the bank to confirm whether they have sent middlemen. Don't let in that you are going to do this, find out exact details about the middlemen -- names, addresses, who they work for -- before calling up. Finally, it is important to be cautious of people who "guarantee" a "risk-free" investment. No investment is risk free.