How safe are small banks offering higher interest rates on deposits to investors?
New and small finance banks are luring depositors with higher rates. Experts say there is little to fear from these relatively less-known entities.
By ET Bureau | Updated:
BCCL
Given that the priority of depositors is safeguarding their capital, many are concerned about safety of their savings.
By Rimme Dirchi
With interest rates as high as 8.5-8.75% per annum on one and three-year deposits, the new-age Davids—new and small finance banks— are going all out to woo depositors looking for more remunerative options.
However, given that the priority of depositors is safeguarding their capital, many are also concerned over entrusting their savings to relatively less-known entities.
Lure of high returns Consider this: SBI offers an interest rate of 3.5% for balance up to Rs 1 crore on savings deposits, while small finance banks Suryoday and Fincare promise 6.25% and 6%, respectively. Savings bank deposits with HDFC Bank and Axis Bank can fetch an interest of 3.5% per annum. At the smaller Lakshmi Vilas Bank, customers can earn 5% returns on savings deposits.
Similar is the case with fixed deposits. A three-year fixed deposit with AU Small Finance Bank can fetch you a 7.3% return, while a similar investment in HDFC Bank will yield 7%. Clearly, small banks are banking on higher interest rates to attract depositors. “Small finance banks are offering higher rates because they are looking to aggressively build their deposit franchise. Their business model allows them to do so,” says Sumit Madan, Head, Branch Banking, AU Small Finance Bank.
Deposit rates of small banks are attractive Safety first A bank deposit is a huge source of comfort for small depositors. Given that these banks are newer entities, depositors are bound to have concerns around their stability. However, industry watchers say such fears are unfounded given the track record of the government and the RBI in dealing with failed banks.
Moreover, the Deposit Insurance and Credit Guarantee Corporation (DICGC) insures deposits— savings, fixed, current and recurring—of up to Rs 1 lakh against the risk or loss that may emerge due to failure of banks. This cover could go up further if the Financial Resolution and Deposit Insurance (FRDI) Bill, 2017 is passed. The launch of differentiated banks, particularly in the backdrop of the benign interest rate scenario that prevailed until recently, fares well for investors scouting higher interest rates.
