With the Reserve Bank of India (RBI) not looking very comfortable with the inflation numbers across food and fuel segments, it is unlikely that there could be a major cut in the upcoming RBI’s monetary policy meet. So, with interest rates not coming down in a hurry, investors especially who are retired and also those who are ultra-conservative may heave a sigh of relief.
Giving a higher rate than established banks
Investors looking to park their funds in bank fixed deposits of commercial banks such as SBI, ICICI, HDFC, or Axis bank may also consider FDs in Small Finance banks. As far as retail investors is concerned, one thing that separates them from older established commercial banks is the higher interest rate that they offer across different tenure.
Currently, SBI FD is offering 6.8 percent to 6.85 percent over 1 to 10 years deposits, while HDFC bank is offering around 7.3 percent for deposits which are less than 5 years and 6.5 percent for 5 years and above. ICICI bank FD is currently offering between 6.9 percent and 7.5 percent on 1 to 10 year deposit. Even Bandhan bank FD is offering 7.65 percent on tenure above 18 months to less than 2 years. On the other hand, some of the Small Finance bank fixed deposits are offering interest rate of about 9 percent per annum.
Which tenure fetches highest rate
In total there are ten Small Finance banks. While most of them are offering about 7 percent over the longer term of say 5 years, the variation is more pronounced in the medium term tenure.
Below are the tenure for which the Small Finance bank is offering its best rate.
Au Small Finance Bank
Tenure: 24 Months 1 Day to 36 Months
Interest rate: 8.50 percent per annum
Capital Small Finance Bank
Tenure: 900 Days
Interest rate: 7.70 percent per annum
Fincare Small Finance Bank
Tenure: 24 Months 1 Day to 36 Months
Interest rate: 9 percent per annum
Equitas Small Finance Bank
Tenure: 2 years 1 day to 3 years
Interest rate: 8.80 percent per annum
ESAF Small Finance Bank
Tenure: 365 – 727 days
Interest rate: 8.75 percent per annum
Suryoday Small Finance Bank
Tenure: 950 Days
Interest rate: 9 percent per annum
Ujjivan Small Finance Bank
Tenure: 799 Days
Interest rate: 8.6 percent per annum
Utkarsh Small Finance Bank
Tenure: 456 Days to less than 2 years
Interest rate: 9.00 percent per annum
North East Small finance Bank
Tenure: 1 year to less than 2 years
Interest rate: 8.50 percent per annum
Jana Small Finance Bank
Tenure: 3 years
Interest rate: 9 percent per annum
While in most banks, there is an additional interest rate for senior citizens of 0.5 percent, in some like
Jana Small Finance Bank, the senior citizens will get an additional 0.75% interest over and above the nominal rate.
How safe are these banks
Regarding the safety, this is what the RBI has to say in its guidelines for such Small Finance banks – “The small finance bank will be subject to all prudential norms and regulations of RBI as applicable to existing commercial banks including requirement of maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).”
Further, each depositor of a registered insured bank including Small Finance Bank are insured upto a maximum of Rs.1 Lakh for all bank deposits, such as saving, fixed, current, recurring deposits under the Deposit Insurance and Credit Guarantee Corporation Act, 1961.
Watch outs
Bank fixed deposit has always been a popular investment option with the investors despite the fact that the interest earned is low compared to other debt investments. Also, the interest earned is fully taxable as per one’s income slab. Illustratively, for someone in the highest income slab paying a tax of 31.2 percent, a 6.5 percent bank FD will translate into a post tax return of about 4.47 percent, barely matching inflation! Those in lower income slabs, ultra-conservative investors may still make use of the opportunity emanating from Small Finance Banks.
What to do
As deposits are insured upto a certain limit and there is also an implication of the TDS, its better to diversify across deposits across banks. With introduction of Section 80TTB, there is a deduction for all bank interests up to Rs 50,000 to a resident senior citizen, however, staggering deposits across banks and tenure will help in deriving optimum benefit.
