Are Fixed Deposits In Small Finance Banks Safe?

At a time when State Bank of India is offering a maximum interest rate of 6.50 per cent, it is not uncommon for small finance banks to offer an interest rate in excess of 8.50 per cent and more.

Jana Small Finance Bank for example, is offering an interest rate of 8.25 per cent on 199-day deposit and about 8.50 per cent on 499-days deposit. While in Suryoday Small finance Bank the interest rate is 8.50 per cent for 2-3 years. The question that readers are often asking is:

Are fixed deposits in small finance bank safe?

About 10 small finance banks were offered license way back in 2015. They have restricted business activities, when compared to a large sized commercial bank in the country.

For starters, these banks are regulated by the Reserve Bank of India, which has stipulated some strict guidelines, which makes these banks relatively safe.

For example, 50 per cent of its loan portfolio should be in the Rs 25 lakhs category, which means big ticket lending is retsricted. What this means is that they cannot lend to one big corporate lender like say a Jet Airways, which goes bankrupt. This means, that their non performing assets could not be eroded by just a few customers.

Small Finance Banks largely cater to the priority sector, or largely the small and medium enterprises or extremely small businesses that were covered by the micro finance institutions and include farmers.

The firm must have a capital of Rs 100 crores at the very least. Apart from this, they have to ensure they meet statutory liquidity ratio requirements, which means that investors seeking their money back, could have access to cash.

Apart from this, once a small finance bank reaches a networth of Rs 500 crores, it would have to list on the stock exchanges. The time frame for such listing has been stipulated at three years.

All in all, the above parameters, make these small finance banks relatively safe. Apart from this, deposits are covered by insurance upto a sum of Rs 1 lakh, which means the risk on deposits default upto Rs1 lakh is covered.

This means it is advisable to invest small sum in these banks. It would be highly imprudent to park all your money in one bank. Ideally, should you hedge your risks and balance the same.

So far, there have been no default issues with some of the small finance banks, unlike some of the cooperative banks, which have had several problems in the past. This also gives confidence in these banks and makes them much safer.

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