Are Small Finance Bank FDs Safe?

Fixed deposits are ideal for one's saving needs. They are preferred for their guaranteed returns and least time commitment towards regulating them.

Of late, many banks have increased their interest rates on term deposits. In comparison, small finance banks offer better returns (over 100 bps). If you are a senior citizen, you can stand to gain 25 bps more.

How are small finance banks different from regular banks?

Small finance banks are governed by the Reserve Bank of India and were started to provide financial inclusion to all the sections of the economy in India. These provide basic banking facilities like accepting deposits and lending.

Promoters with more than ten years of experience in banking and finance business are allowed to start these banks. Most of the small finance banks in India used to be micro-finance banks or non-banking financial companies.

These provide high-interest rates on savings as well as fixed deposits compared to regular banks. For example, State Bank of India will fetch you 3.5 percent for a less than 1 crore on savings deposit account, while a small finance bank like Suryoday will give you 6.5 percent.

These institutions offer higher interest rates as they are looking to build their deposit infrastructure as they are relatively new.

In addition to basic banking services, they also sell forex, mutual funds and insurance to customers and even provide internet banking facilities and debit cards. They can also flourish into a full-fledged bank in the future.

They, however, do not extend large loans or deal with sophisticated products.

Protecting your savings

As a small investor, your concern is not just to get higher returns but to keep your investments safe. You may not have heard of most of these banks, and you could be skeptical about the entrusting your money with them.

These banks come under the Banking Regulation Act, 1949 and have the provisions under Deposit Insurance and Credit Guarantee Corporation Act, 1961. You may be aware that the Deposit Insurance and Credit Guarantee Corporation Act, 1961 insures deposits up to Rs 1 lakh against the risk of a bank's failure. The limit can increase of FRDI bill is passed.