As of now, the highest FD interest rates are offered by the small finance banks. And it is natural for people to get attracted to these when other larger and established banks in India are offering much lower interest rates irrespective of your fixed deposit tenure.
So you may have questions like:
- Are Small Finance Banks safe for deposits in India (2023)?
- Are Small Finance Banks FD safe for senior citizens (2023)?
- Should you invest in high interest rate FDs of small finance banks (2023)?
Let’s try to address these questions and help you decide.
What are Small Finance Banks (SFBs)?
Small finance banks (SFBs) are a special category of banks that have been licensed by the RBI to provide financial services to the population which generally got left out by the larger banks. So these banks are allowed to provide basic banking services with the primary aim of financial inclusion. As of now, there are just 12 Small Finance Bank in India that are listed here.
These SFBs generally offer higher returns on deposits compared to other larger commercial banks to attract depositors and then these deposits are utilised for offering loans to mostly to priority sector borrowers.
Are Small Finance Banks (SFBs) risker?
Given that these small banks focus a lot on the unbanked sections of the society and many times those from small business units, small and marginal farmers, micro and small industries, and unorganised sectors, these are comparatively riskier from that angle. And secondly, the concept of SFBs is new and is yet to pass the test of full blown financial crisis. So these two things should be kept in mind when assessing the riskiness of SFBs vs regular banks.
And it is for these reasons that people are worried about the safety of small finance banks and ask questions like:
- Is Au Small Finance Bank safe for FD?
- Is Capital Small Finance Bank safe for FD?
- Is Fincare Small Finance Bank safe for FD?
- Is Equitas Small Finance Bank safe for FD?
- Is ESAF Small Finance Bank safe for FD?
- Is Suryoday Small Finance Bank safe for FD?
- Is Ujjivan Small Finance Bank safe for FD?
- Is Utkarsh Small Finance Bank safe for FD?
- Is North East Small finance Bank safe for FD?
- Is Jana Small Finance Bank safe for FD?
- Is Shivalik Small Finance Bank safe for FD?
- Is Unity Small Finance Bank safe for FD?
However the SFBs are regulated by the RBI and have to adhere to the rules and regulations of the RBI, like any other bank.
In addition, there is DICGC coverage.
Are Small Finance Banks covered under DICGC insurance?
Yes. Like all other banks, the the SFB deposits are also covered under Deposit Insurance and Credit Guarantee Corporation (DICGC) insurance cover that insures principal and interest up to a maximum of Rs 5 Lakh per person per bank.
The DICGC Rs 5 lakh cover not only insures deposits, but, also savings, current, recurring deposits etc. So, to the extent of Rs 5 lakhs the deposits are insured.’
If you are curious to know which all banks in India are insured by the DICGC, then I have already done a detailed post on this and you can read it here at latest DICGC insured banks in India.
Related reading – Which 3 banks, as per RBI, are the safest banks in India?
Should you invest in FDs of Small Finance Banks?
It is natural to be tempted by the high FD rates offered by many of these small finance banks. But temptation and greed aside, what is the right thing to do?
Small Finance Banks offer high interest rates because of a reason – and that is that there is additional risk that they are compensating for when they take deposits. So don’t forget that. SFBs are comparatively riskier, at least concept wise, then regular full-fledged large banks.
Considering all that, it makes sense to not put all your FD money in small finance banks. It is not worth the risk for slightly high interest rates offered by them.
When investing in Fixed Deposits in Small Finance Banks, it is suggested to put only a portion of your FD money in each bank that is covered under the DICGC insurance cover. If you have deposits in two different small finance banks, they would be insured separately up to Rs 5 lakh each. Therefore, one can safely invest in small finance bank deposits up to Rs 5 lakh. For amounts above that, ideally you should monitor the functioning and financial strength of the bank periodically.
If small finance banks offer higher FD rates than big banks, where should you invest your FD money?
If you have a large amount that you want to put in bank deposits and high FD rates offered by small finance banks are tempting you, then here are some pointers to get you thinking:
- Put about 70-80% in the RBI-identified Systematically Important Banks or the larger established banks of India.
- The rest can be parked in other banks (including small finance banks) that may seem attractive to you as they may be offering higher rates.
- You might be tempted to earn higher FD rates but it is advisable to not be too greedy for a few basis points of extra returns. Simply spread your deposits across SIBs. If not all, then at least a major chunk. Best to limit your exposure to FDs of small finance banks to 20%.
- At least for your emergency fund, stick with the RBI’s systemically important banks or the larger ones in India and don’t put it in small finance banks.
- Senior citizens who are considering investing in Small Finance Bank FDs should be aware of the risks involved (like credit risk and a higher risk of default compared to larger banks). Another issue is that many of these SFBs have a limited branch network and may not be easily accessible to senior citizens. So this aspect should be considered as well. Senior citizens are better off investing in SCSS and POMIS for regular income.
In general, the Small finance bank fixed deposits are not the right choice for investors who want to make sure their money is completely safe and don’t want to take any risks. If you’re someone who needs a safe place to keep emergency fund, a retiree who wants a regular interest income from FD, or an investor who just wants to protect their money, then SFB deposits might not be the best option for you. However, if you already have investments in other large bank FDs and are willing to take a bit more risk, then SFB deposits can be a good way to do that and optimize your overall FD portfolio returns.
I hope you found this discuss on Should you opt for a Small Finance Bank or a big Bank for FD, useful. Ultimately, the decision to invest in a small finance bank FD should be based on individual risk appetite. It’s advisable to consult with a investment advisor to decide the best investment strategy based on one’s unique requirements and circumstances.
So that was about whether small finance bank fixed deposits are safe or not in India (2023).