The Reserve Bank of India (RBI) cut the repo rate by 125 basis points through 2025, and most large banks have steadily passed on those cuts to both borrowers and depositors. Yet, advertisements promising fixed deposit (FD) rates of up to 8% at small finance banks (SFBs) continue to catch the eye.
The reason is simple: unlike larger lenders with diversified and sticky deposit franchises, small finance banks rely more heavily on retail deposits to fund their loan books and, therefore, need to offer higher rates to attract and retain savers.
The rate gap is significant compared to a public sector bank. Data from Paisabazaar as of May 29 shows that for five-year fixed deposits, small finance banks offer interest in the range of 5.75-7.90%, compared with 5.75-7.25% at private sector banks and 5.25-6.75% at public sector banks.
The pitch from small finance banks goes beyond just the interest rate. "Small finance banks have to be very competitive because they are trying to take business away from scheduled commercial banks and today, people need compelling reasons to switch," said Adhil Shetty, chief executive of BankBazaar. That competition is pushing banks to innovate on the product side, waive fees such as the penalty on premature FD withdrawals or calculate interest on a daily, rather than monthly basis, quietly adding to your effective return.
So, should small finance banks be part of your fixed deposit strategy? Here is how to think through.
The case for them
India's banking industry, through the Deposit Insurance and Credit Guarantee Corporation (DICGC), insures deposits up to ₹5 lakh per depositor per bank, covering both the principal and interest. This applies to small finance banks as it does to an SBI or a HDFC Bank.
The structure can work especially well for a couple. Jagadeesh Mohan, founder of EMI Saver, explains that a husband's individual FD, a wife's individual FD, and a joint FD where one spouse is the primary holder can together secure ₹15 lakh of fully insured deposits at a single small finance bank, all earning the higher rate.
Beyond fixed deposits, several small finance banks offer savings account interest of up to 7.6% on balances over a threshold that is usually very high and could be irrelevant for an average customer. Most public sector banks pay 2.70-3.0%. For instance, Suryoday Small Finance Bank offers the highest interest of up to 7.5% on a savings account for balances of above ₹25 lakh and up to ₹5 crore. For balances between ₹5 crore and ₹25 crore, the bank offers 7.6%.
The savings account interest rates are tiered by account balance and are calculated on an incremental slab basis. So, on a savings account of say ₹10 lakh, the interest will be 5.5%, but for lower balances of up to ₹1 lakh, the interest is 2.5%.
Keep in mind that some scheduled commercial banks may also follow the same practice of offering higher interest rates on savings bank accounts for higher balances, however, the rates offered by SFBs are relatively higher.
Lenders such as Slice Small Finance Bank don’t have the minimum balance requirement and offers a repo-linked savings interest rate to its customers and it also offer features such as daily interest accrual. Other banks may have penalty-free exit windows and tenure specific deposits at premium rates.
In practical terms, a ₹1 lakh balance held for a full year, a standard PSU Bank savings account, that compounds interest quarterly, at 2.70% has ₹2,727 in interest. The same balance at Slice, compounded daily at 5.25%, returns approximately ₹5,389. It also prominently highlights a unique feature of crediting interest daily, rather than monthly. But in numbers, the impact is modest. To illustrate, assuming the same rate, on a ₹5 lakh balance at 5.25%, the daily crediting earns ₹26,949 over a year versus ₹26,891 under monthly crediting, a difference of ₹58. So, a compelling reason to choose Slice may not be daily compounding of interest but the repo-linked savings rate itself.
A Slice spokesperson said that this is more than just an introductory offer for them. “The risk-free cost of money in India is essentially what the government pays on its short-term securities like 3-month and 12-month treasury bills, and the repo rate broadly aligns with these," Slice added. "This is what money is worth when there's zero risk attached to it. Getting that return today usually means investing in mutual funds that park money in government treasuries, which isn't a route everyone can navigate.”
Equitas Small Finance Bank charges no penalty on premature withdrawals of FDs held for more than six months on their FD products unlike 0.5-1.0% on the applicable FD interest rate typically charged by traditional banks.
Baskar Babu, MD and CEO of Suryoday Small Finance Bank, said digital channels keep customer acquisition and deposit mobilization costs low and 60% of the bank's traditional FD customers renew at maturity—stable across years, even when rates were moving. "Our bank maintains a risk-averse mindset with a comfortable CRAR level," he said, adding that with digital deposits averaging ₹1.2 lakh per ticket size, depositor risk is minimal. CRAR, or Capital to Risk Weighted Assets Ratio, measures the safety cushion a bank holds against potential losses.
Industry experts, however, caution that such offers can be marketing strategies aimed at building a customer base and may change over time.
The case against
There are risks even if they are manageable. "Small finance banks carry higher credit risk than large commercial banks by definition as their loan books are concentrated in microfinance, small business lending, and affordable housing, segments that are more sensitive to economic stress," said an industry expert who did not wish to be identified. The expert added that these banks have urban deposit centres but lend at very high rates to the unserved and underserved sections of the population.
Adding to this, Suresh Sadagopan, founder of Ladder7 Financial Advisories said: “It's important to understand that higher interest rates offered by small finance banks come with an element of risk. To pay depositors 8-9%, a bank may need to earn 11–12% or more on its lending book to maintain its net interest margin."
While small finance banks follow risk-management practices, the underlying risk cannot be wished away, he said. "Many of their borrowers are customers who may not have qualified for credit from larger commercial banks. As a depositor, it's important to understand that the higher return comes with a higher level of risk. So it's better to stay within the ₹5 lakh limit that's insured.”
While the DICGC insurance cover of ₹5 lakh per depositor per bank helps, it also means that any amount above this limit, including interest accrued by maturity, sits outside the safety net.
Moreover, some of the benefits that they use to attract depositors such as lounge access, fee waivers, and reward points on credit and debit card spends are likely to change after the customer acquisition phase is done. These changes are made through updated terms and conditions that customers usually miss.
For instance, within roughly two years of offering unconditional airport lounge access on its Privilege Savings Account, effective October 2025, Ujjivan Small Finance Bank tied the benefit to a ₹5,000 minimum quarterly spend on the debit card. While this ₹5,000 threshold initially applied to both Platinum and Domestic Select cards in late 2025, subsequent NPCI framework updates completely eliminated lounge perks for the RuPay Platinum variant, leaving the spend requirement active strictly for higher-tier Select cards.
The way to go about it
According to Shetty, users should understand that they have to be cognizant of what the current offer is because all of these products are time-based products. “Any offer is never in perpetuity,” he said.
Experts advise treating the FD rate as the only reliable benefit from a small finance bank as it is locked in at the time of booking. Savings account rates, daily interest features, and lifestyle perks sit on shifting ground and can be revised or withdrawn without notice.
Mohan of EMI Saver also said new age platforms such as Stable Money are lowering the barrier to accessing SFB FDs by aggregating fixed deposits from multiple banks and NBFCs, allowing users to compare rates and invest without opening separate bank accounts at each institution.
Amol Joshi, founder of PlanRupee Investment Services, believes these can be considered, however, the hassle is too much for the advantage you get. He said people in the higher tax brackets of 30% look for a tax-efficient structure as FD interest is charged at slab rate, and they can look at something like an arbitrage fund that offers tax benefit as well as liquidity. According to him, the benefit from higher savings interest can only materialize if one keeps large amounts in savings.
Overall, the interest rate benefit from small finance banks is real, but it comes with conditions. It's prudent to keep every deposit within the DICGC limit, check the NPA ratios, and treat perks like time-based offers. By keeping up to date with the terms, a careful saver may find a better deal through SFBs.