BackNew banks’ FDs have higher interest rates
New and small banks are currently offering higher interest rates than old banks because they want to increase their customer base
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What is the interest rate on your 1-year fixed deposit (FD)? If you bank with the older large commercial banks, you would have seen rates fall over the past 2 years. For instance, State Bank of India (SBI), the country’s largest lender, currently gives an interest rate of 6.90% on FDs that matures in a year. Private sector banks such as ICICI Bank Ltd and HDFC Bank Ltd are also giving 6.90% per annum for the same period.
In comparison, Navi Mumbai-based Suryoday Small Finance Bank Ltd, which started operations on 23 January, is offering 9% in the same maturity basket. According to a Religare Capital Markets report, Utkarsh Small Finance Bank Ltd and Equitas Small Finance Bank Ltd are offering 8.25-8.75% per annum on 1-year FDs. Newer universal banks such as Bandhan Bank Ltd are also offering a higher interest rate than larger banks, at 7.25-8% for 1-2 years.
In fact, larger banks are offering interest rates that are even lower than the small savings rate. For instance, 5-year post office time deposit offers 7.8%, while SBI gives 6.50% on a 5-year FD. Here is why new banks offer higher interest rate and what you should do:
Rate difference
New and small banks are currently offering higher interest rates than old banks because they want to increase their customer base. According to analysts, the larger banks are flush with funds after demonetization. Small finance banks, which were earlier NBFCs, as a rule have to decrease their inter-bank borrowing. Hence, earlier if they borrowed at, say 9.5-10% from banks, now even if they give a higher FD rate at 8.5% to consumers, it still makes sense for the small finance banks. Bankers believe that newer banks are positioning themselves differently by offering competitive pricing.
Small finance banks
If you are looking to put money in FDs, usually you will look at interest rates. But customer service is also important. You don’t want your money to be stuck with a bank just because of lack of access points. However, with technology, most banks allow you to book as well as withdraw FDs online. Whether it is a small bank or a bigger one, returns on bank FDs are relatively low risk, compared with other products in the market. You get a protection cover on your bank deposit for up to Rs1 lakh. This protection is provided by a Deposit Insurance and Credit Guarantee Corp., a wholly owned subsidiary of the Reserve Bank of India.
It insures all bank deposits—such as savings, fixed, current and recurring—against the risk of loss arising from failure of a bank, up to ₹ 1 lakh. But don’t move all your money into the new banks. Invest with limited exposure.
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