A safe avenue with attractive rates

Fincare Small Finance Bank offers 9% for 24- to 36-month deposits

Rates offered by private and public sector banks on their fixed deposits are still nothing to write home about. Many non-banking finance companies offer deposit rates that are better than bank interest rates, for the same tenure.

However, apart from the usual credit risk, the recent liquidity crisis faced by the NBFC segment pegs up the risk factor of this segment as a whole.

In this scenario, investors looking for safe avenues to park their money without compromising too much on returns can consider deposits of small finance banks (SFBs).

Being recent entrants, these banks have been offering good rates on their fixed deposits to woo customers.

Benefits

SFBs focus on the under-served sections of the economy such as small business units, small and marginal farmers, and micro and small industries. But while these banks carry restrictions on their lending activity (75 per cent of loans in priority sector and at least 50 per cent loans of less than ₹25 lakh), there is no such curb on deposit taking.

Besides, unlike NBFC deposits that have no insurance cover, SFB deposits are 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. SFBs are also required to maintain a much higher capital adequacy ratio than normal banks. Thus, SFB deposits are safe for investors who don’t have much appetite for risk.

Most SFBs offer attractive rates for one- to three-year deposits. Among these, Fincare SFB offers 9 per cent for 24-36-month deposits. Investors can park a portion of their surplus in this deposit under the cumulative option. A two- to three-year window is also ideal as it provides opportunity to re-invest at higher rates as interest rates move up over the medium term.

Fincare’s offer is superior to what’s given by traditional banks. Most public sector banks offer only 6-7 per cent interest rate for this bucket. Private sector banks give up to 8 per cent for the same period. NBFCs such as Shriram Transport Finance offer a similar 9 per cent for three-year deposits under the non-cumulative option. Mahindra Finance also offers 9 per cent, but only for 33-40-month online deposits.

Hence, these options are not an apple-for-apple comparison with that of Fincare. Besides, the risk-reward aspects of NBFC deposits are also different from those of SFBs. Investors who don’t have the risk appetite for NBFC deposits or have enough exposure to the same, can consider SFB deposits as a diversifier.

About Fincare

Fincare SFB commenced operations in July 2017. It has a presence across Tamil Nadu, Karnataka, Andhra Pradesh, Gujarat, Maharashtra, Madhya Pradesh, Puducherry, Haryana, Delhi and Rajasthan.

While the bulk of its lending is still to the micro-finance segment, Fincare is looking to diversify its portfolio. The bank has also bounced back quite well from the impact of demonetisation, improving its loan growth and profits since then.

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