BackWhy smaller banks give higher interest rate on fixed deposits
Smaller banks find it difficult to source funds
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When you want to park you money in a fixed deposit (FD), the first thing that you check is the interest rate. But have you noticed that smaller banks usually give higher interest rates on FDs than bigger banks? Here is why.
Interest rates on fixed deposits
State Bank of India (SBI), the country’s largest lender, gives 9% interest rate on FDs below 1 crore of one-two year tenor. ICICI Bank Ltd, the second largest lender based on total assets as on 30 September 2013, offers 8-9% on term deposit on similar tenor. Bank of Baroda, the third largest bank, gives 9.10% on FDs of tenor of one to six years.
Now, let’s see what the smaller banks offer? For a similar period (one year), Lakshmi Vilas Bank Ltd, which comes 38th based on total assets as on 30 September, offers 9.75% interest rate on your FD. If you choose City Union Bank Ltd and Karnataka Bank Ltd, you will earn 9.50%.
Why the difference?
Analysts say that smaller banks usually find it difficult to source funds. Avenues to raise money such as the money market are expensive for them. Bigger banks have a better command in the certificate of deposit and commercial paper market since they have better credit ratings. Whereas smaller banks have lower bargaining power in these markets.
The cost of raising funds through short-term paper is much higher for smaller banks than for larger banks. Hence, they offer higher rates to the retail customers to get deposits.
Secondly, smaller banks have a smaller retail base compared with bigger banks and hence they try to attract more customers by offering attractive interest rate on FDs.
Which one should you choose?
Customer service in terms of number of branches or network can be an issue for smaller bank customers. Unlike banks such as SBI or ICICI Bank, small banks are usually concentrated in specific regions and may not have enough access points or branches, which could be a dampener for customers.
In the Indian context, returns on FDs are relatively risk-free—be it with a large bank or a small bank. But you must remember that a maximum of only 1 lakh of an FD is protected by deposit insurance (a protection cover that you get on your deposits in banks). This protection is usually provided by a government agency and insures all bank deposits such as savings, fixed, current and recurring against risk of loss arising from failure of a bank. So, if your bank gets liquidated or an amalgamation or merger comes into force, your insured amount (i.e., a maximum of 1 lakh) will be paid to you.
Choosing an FD, however, shouldn’t be only based on the interest rate. You should look at the banking services as well.
—Vivina Vishwanathan
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