Equitas Small Finance Bank has hiked its interest rate on deposits between ₹1 lakh and ₹5 crore to 7% from 5.5%, with effect from 10 June. Interest rates on savings accounts as well as fixed deposits have been falling as the Reserve Bank of India (RBI) has been cutting policy rates. But small finance banks (SFBs) continue to offer relatively higher rates amid this falling interest rate environment. We tell you why and whether it’s a good idea to opt for them.
HOW DO THEY DO IT?
An abundance of bank deposits is one reason for banks to cut deposit rates, and this is exactly what has happened. Given the uncertainty in the markets, Indian investors have rushed to move their savings to what is considered as the most reliable instrument: fixed deposits (FDs). This led to many banks to cut interest rates to 5-6%. For instance, large commercial bank (SCB) the State Bank of India is now offering an interest of 5.4% on a fixed deposit with a tenure of five years and above.
So how do SFBs continue to offer high interest rates and even hike their interest rates in this environment? According to Murali Vaidyanathan, president and country head, Equitas Small Finance Bank, their business model is different from that of large commercial banks, and at the core of it is the need to expand their customer base. “Offering a better value proposition during this time is critical for consumers as a whole, wherein, all savers and investors are looking for reliability and consistency as a way of life. So this opens a door for opportunities for all segments from senior citizens to salaried employees to professionals across to allocate their financial assets backed by attractive returns and safety," he said.
The SFBs don’t have the vast account base that most large commercial banks do. Therefore, they offer lucrative deposit rates to attract potential customers and build up their deposits. As they gain ground and their cost of funds goes down, the interest rates might also dip.
You might be wary about the safety of your deposits if you opt for an SFB instead of a large commercial bank, but keep in mind that they have the same regulator. “Small finance banks are regulated by RBI. The deposit insurance for ₹5 lakh is applicable to them as well, said Adhil Shetty, CEO, BankBazaar.
However, Shetty cautions against blindly trusting any entity. “Considering the current uncertainty, it is even more imperative that you diversify all your investments, including your FD exposure. Of the total funds earmarked for FDs, do not invest more than 20% in FDs of small banks. FDs are used primarily because they offer capital protection. Do not compromise on the safety of your capital for returns. Make sure you do your own research before investing in the FDs offered by smaller banks," he said.
While the higher interest rates on deposits offered by small finance banks are certainly lucrative, given the falling deposit rates of other banks, make sure to do your due diligence and consider factors such as tenure and credibility before you park your money in an FD.