Save Smart. Small banks, big rates

The last two years has been particularly trying for depositors. Rates on bank deposits have fallen sharply, more so after the Centre’s demonetisation move last November. On an average, rates on your fixed deposits have plummeted by nearly two percentage points over the last two years.

The unkind cut in savings deposit rates a few months back, has also come as a hard blow for savers. Savings deposit rates in nearly all banks that remained unchanged since 2011 at 4 per cent, fell by 50 basis points, after SBI dealt the first blow. While in a falling rate cycle, savers are often handed the short end of the stick, locking into relatively higher interest rates can somewhat ease the pain.

Enter small finance banks that have become operational after being granted license by the RBI, nearly two years back. With these newly-licensed banks upping the ante to woo customers and rake in deposits, savers still have good deals on offer.

There is a common misconception that small finance banks are not for everyone. True, small finance banks differ from mainstream universal banks, in that they have been tasked to primarily serve the underserved sections of the economy such as small business units, small and marginal farmers, and micro and small industries. But while they carry restrictions on their lending activity (75 per cent of loans to be in priority sector and at least 50 per cent of loans up to ₹25 lakh), there is so such curb on deposit taking.

Of course, a small finance bank that is only now expanding its footprint across cities may not be able to offer you transactional comfort like your friendly neighbourhood bank. But given that most of the small finance banks offer the technology and digital solutions on par with other banks, lower branch presence may not be as much of dampener. Also, when it comes to fixed deposits that are locked in for a specific period of time, rates matter more than operational ease.

If you are worried about the safety of your deposits, note that deposit insurance is compulsory for all banks in the country. With new format banks joining the fray, aside from deposits in all public sector banks, private sector banks, local area banks, and regional rural banks, small finance banks and payments banks too are now covered by the Deposit Insurance and Credit Guarantee Corporation of India (DICGC). Each depositor is insured up to ₹1 lakh for both principal and interest. For calculating this limit, all deposits across branches of the same bank are aggregated.

What’s more, small finance banks are required to maintain a much higher capital adequacy ratio of 15 per cent, against the 9-odd per cent that traditional banks have to adhere to. This helps mitigate the risk attached with a newly operational bank.

So small finance banks are an option that depositors can consider to earn higher interest on their deposits. What’s on offer?

Let us look at savings deposits first. While most banks now offer 3.5 per cent on lower value deposits below ₹50 lakh or ₹1 crore, a few small finance banks offer 6 per cent to 7.25 per cent on similar deposits.

While a few other banks such as Kotak Bank, YES Bank , IndusInd Bank and RBL Bank also offer higher rates (5-6.5 per cent) on saving deposits, the threshold ( in terms of deposit value) for these higher rates are much higher.

For instance, in case of RBL Bank, balances over ₹10 lakh fetch you 6.5 per cent. In case of Fincare Small Finance Bank, you can earn 7 per cent on balances above ₹1 lakh. Suryoday Small Finance Bank offers 7.25 per cent on balances above ₹1 lakh up to ₹10 lakh. ESAF gives you 7 per cent on deposits above ₹10 lakh. For deposits under ₹1 lakh small finance banks offer 5-6.25 per cent interest rate.

For many of us, higher interest rates on savings deposit may not be reason enough to transact with a new bank. But we would like to shop for the best rates on fixed deposits that are locked in for a long period of time.

The differential rates offered by small finance banks on fixed deposits are far more attractive. In the one to two-year deposits, for instance, most banks on an average offer 6.5-6.75 per cent. The best rate offered is by IDFC Bank at 7.5 per cent for a 366-day deposit and 7.25 per cent for up to two years. Some small finance banks offer far higher rates. Fincare Small Finance Bank offers 8.75 per cent for deposits with tenure of 21 months to 24 months. ESAF offers 9 per cent on deposits from one to two years. Suryoday and Utkarsh Small Finance Bank offer 8.4-8.5 per cent for deposits up to two years.

For two to three-year deposits, while most banks offer around 6.5-6.75 per cent (best rate 7.3 per cent by RBL Bank), Fincare and Suryoday top those rates, offering 9 per cent and 8.75 per cent respectively.

Most of these small finance banks also offer senior citizens an additional 0.5 percentage point interest.

With small finance banks offering a notable 150-200 bps higher rate on certain fixed deposits, depositors can consider them. With inflation creeping up and deposit rates at rock bottom levels, savers need to shop for rates beyond the obvious choices.

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