At the moment one of the most lucrative interest rates on fixed deposits are being offered by small finance banks. Larger more established commercial banks in the country offer a maximum interest rate of 5.5%, no matter how long you place the fixed deposits for.
On the other hand small finance banks can offer you interest rates as high as 8 per cent. But, is it advisable to place money in these small finance banks?
How safe are small finance banks?
To begin with, small finance banks are governed by regulations from the Reserve Bank of India, just like full-fledged commercial banks in the country.
All prudential norms set for commercial banks like cash reserve ratio requirements, statutory liquidity ratio requirement etc., also apply to small finance banks. Other requirements like eligibility criteria, fit and proper criteria and promoter contribution are also defined by the Reserve Bank of India and could change from time to time. Small finance banks also have to maintain a capital adequacy of 15 per cent of their risk weighted assets, another important parameter for banks.
In short, proper regulations are in place, which enhances and makes small finance banks, much safer.
Deposits up to Rs 5 Lakhs maybe safe in small finance banks
If you are placing deposits in small finance banks, they are insured by the Deposit Insurance Credit Guarantee Corporation (DICGC) to the tune of Rs 5 lakhs. The DICGC not only insures deposits, but, also savings, current, recurring deposits etc. So, to the extent of Rs 5 lakhs the deposits are insured.
It is not only the principal amount, but, also the interest amount that is insured. If you have deposits in two different small finance banks, they would be insured separately.
The insurance on fixed deposits upto Rs 5 lakhs, thus make investing in small finance banks safe to the extent of amount insured. However, we all know should a bank go bust, it could be a hassle to get your money back.
Invest smaller amounts
It's clear that if you are investing, you can take a risk upto Rs 5 lakhs only. Many small finance banks in the country offer an interest ranging from 7 to 8 per cent. Most of these banks are engaged in micro finance, which is largely loans to small businesses.
Despite the covid-19 cases and a collapse in economic activity, we have not head of any worries with regards to small finance banks. Unlike the large commercial banks, where a few large accounts could lead to severe problems, small finance bank have many more accounts and smaller exposure.
For example, Yes Bank has several thousand crores lent to a few large corporate houses, where the loans turned bad. Small finance banks tend to spread their risk, with less exposure to a single entity and larger number of customers.
In conclusion, if you are looking for higher interest rates, go for small finance banks, but with limited exposure. Some small finance banks are listed entities and have a long-standing track record.
About the author:
Sunil Fernandes has spent 26 years covering business and finance in India and abroad. Sunil has worked with frontline daily newspapers including Hindustan Times, Deccan Herald and Gulf Times. He has also worked with investment magazines like Dalal Street Investment Journal and Oman Economic Review. His forte remains stocks, commodities, debt, mutual funds and tax planning. Sunil is currently Managing Editor for Goodreturns.in