For investors, who invest in fixed deposits and other savings instruments, the year 2020 has been tough. Interest rates have virtually collapsed and every few weeks, banks have been reducing interest rates on fixed deposits. Now, investors get a maximum of 5 per cent on the deposits of India's largest lending bank, State Bank of India.
Investors should now consider other options with safety, where they are investing smaller sums of less than Rs 5 lakhs.
7% Interest with safety from IDFC First Bank
When we safety, we want to clarify that it is for a sum upto Rs 5 lakhs. Go for the IDFC First Savings Account, if your balance in the savings account is unlikely to exceed Rs 5 lakhs. This is because savings accounts, current account balances and fixed deposits of up to Rs 5 lakhs are insured with the Deposit Insurance and Credit Guarantee Corporation run by the Reserve Bank of India.
We do not believe that IDFC First Bank is risky at the moment. In fact, the deposits of the bank have a AAA rating. However, the future is uncertain and suddenly if good loans turn bad, any institution can run into problem.
However, in India we have seen that when a full-fledged commercial bank runs into problems, it is either taken over or bailed out. We are by no means saying that IDFC First is likely to face that situation, but, we are just addressing skeptics.
In the past, Global Trust Bank was taken over by Oriental Bank of Commerce and Yes Bank was virtually bailed out by SBI. Yes, the cooperative banks have ran into trouble. But, there is nothing in history to prove that a full-fledged commercial banks have ran into trouble and not paid back depositors.
Strong quarterly performance for the June quarter
It was a covid-inflicted quarter for corporates and banks for the quarter ending June 30, 2020. However, IDFC First Bank saw its Net Interest Income (NII) grow by 38% year-on-year from Rs. 1,174 crore in Q1 FY20 and by 4% QOQ from Rs. 1,563 crore to Rs. 1,626 crore in Q1 FY21.
The pre-provisioning operating profit too grew by 181% year-on-year and 13% quarter-on-quarter to Rs. 892 crore in Q1 FY21 as compared to Rs. 318 crore in Q1 FY20 and as compared to Rs. 787 crore in Q4 FY20.
The asset quality, net profit and the provision coverage ratio too improved during the quarter ending June 30, 2020.
If you are a risk averse individual, you can invest under Rs 5 lakhs, as the amounts upto Rs 5 lakhs are insured. However, at the moment IDFC First is a relatively safe bank, but, as mentioned if you do not wish to take a risk, go for under Rs 5 lakhs.
The 7 per cent interest on savings account is rather attractive, given the current situation of low interest rates. The bank also offers various other benefits on its savings account. There is a personal accident cover to the tune of Rs 25 lakhs that is offered free. There is also a free debit card that is valid for life being offered from the bank.
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