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Business News/ Money / Personal Finance/  Small finance banks lower interest rates
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Small finance banks lower interest rates

RBI started offering small finance bank licence only around six years back. Some MFIs opted for a small bank finance licence. As these are yet to establish a track record as banks, most investment advisers recommend depositors should park only short-term funds with them

Some mid and small-sized private sector banks also offer interest rates similar to small finance banks. (Photo: Mint)Premium
Some mid and small-sized private sector banks also offer interest rates similar to small finance banks. (Photo: Mint)

NEW DELHI: The days of small finance banks offering over 7% returns on fixed deposit (FD) are coming to an end. Most of them have started reducing interest rates across segments.

Suryoday Small Finance Bank is the latest to lower deposit rates. From 21 June, the bank will lower FD rates by 25-100 basis points on different maturities. One basis point is one-hundredth of a percentage point.

The steepest reduction is on the five-year FD, on it will offer a 6.25% intreat rate compared to 7.25% earlier. The lowest cut (25 bps) is on FDs maturing between one and two years, at 6.5% compared to 6.75% earlier.

Earlier this month, Capital Small Finance Bank and Equitas Small Finance Bank reduced interest rates. Capital Small Finance Bank offers the highest interest rate on a 900-day FD at 6.25%, and Equitas Small Finance Bank offer its highest rate 6.5%, on an FD of 888 days.

Equitas Small Finance Bank, Fincare Small Finance Bank and Jana Small Finance Bank had lowered interest rates last month.

The only banks that offer a 7% interest rate on FD are Utkarsh Small Finance Bank (for 700 days) and North East Small Finance Bank (for 777 days), according to their websites.

Most of these banks are still attractive if a depositor wants to open an FD for short term. They offer between 6% and 6.5% rates for maturities of over one year and up to three years.

Reserve Bank of India started offering small finance bank licence only around six years back. Some microfinance institutions opted for a small bank finance licence. As these are yet to establish a track record as banks, most investment advisers recommend depositors should park only short-term funds with them.

“Many of these banks lend to a population that would be considered ‘risky’ in banking. We are yet to see how covid-19 impacted these borrowers. Therefore, I would advise depositors to be cautious," said Basavaraj Tonagatti, a Bengaluru-based Sebi-registered investment adviser.

For small depositors, it may be challenging to evaluate a bank’s financials to understand the impact of the pandemic on their depositors. Therefore, look at depositing only limited funds with a small finance bank.

“Depositors can book an FD of up to three years. However, they should restrict investments up to 5 lakh," said Mrin Agarwal, founder-director, Finsafe India. She suggested restricting the amount as deposits of up to 5 lakh are insured. If any commercial bank fails, depositors will get up to 5 lakh from the Deposit Insurance and Credit Guarantee Corporation.

For a longer tenure, Agarwal suggested Post Office time deposits. It offers a 5.5% interest rate for one, two, and three-year FD and 6.7% on a five-year one.

Some mid and small-sized private sector banks also offer interest rates similar to small finance bank. DCB Bank, for example, offers 6.5% interest on FDs of 36 months and above, according to its website.

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Published: 18 Jun 2021, 03:27 PM IST
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