Fixed Deposits (FDs) are one of the most popular investment options in India, offering safety and steady returns. While large banks provide moderate FD interest rates, Small Finance Banks (SFBs) attract customers by offering significantly higher rates. Many SFBs offer interest rates above 9% to senior citizens, which is much higher than what major private and public sector banks provide. But why do these banks offer higher rates, and how safe is it to invest in them? Let’s understand the reasons and key factors to consider before opening an FD in a Small Finance Bank.
What Are Small Finance Banks?
Small Finance Banks are specialized financial institutions regulated by the Reserve Bank of India (RBI). Their main goal is to provide banking services to underserved populations, including small business owners, farmers, and low-income groups. They offer loans, savings accounts, and FDs, just like traditional banks. However, their primary focus is on microfinance and small-ticket loans.
Why Do Small Finance Banks Offer Higher FD Interest Rates?
- Need to Attract Deposits: Since SFBs are relatively new in the banking sector, they need more deposits to grow their lending business. Higher FD interest rates help them attract more customers.
- Higher Lending Rates: These banks mainly lend to people who do not qualify for loans from big banks. Since their loan interest rates are higher, they can afford to pay higher interest on deposits.
- Less Liquidity: Compared to larger banks, SFBs have fewer deposits. To maintain cash flow for lending and operations, they offer competitive FD rates to bring in more funds.
- Competition with Bigger Banks: Since most customers trust well-established banks, SFBs use higher FD interest rates as a way to compete and expand their customer base.
Current FD Interest Rates in Small Finance Banks
Here’s a look at the highest interest rates offered by some Small Finance Banks:
For General Customers:
| Small Finance Bank | Tenure | Interest Rate (%) |
| AU Small Finance Bank | 18 Months | 8.00% |
| Equitas Small Finance Bank | 888 Days | 8.25% |
| Esaf Small Finance Bank | 888 Days | 8.38% |
| Jana Small Finance Bank | 1-3 Years | 8.25% |
| Northeast Small Finance Bank | 18 Months-3 Years | 9.00% |
| Suryoday Small Finance Bank | 5 Years | 8.60% |
| Ujjivan Small Finance Bank | 18 Months | 8.25% |
| Unity Small Finance Bank | 1001 Days | 8.60% |
| Utkarsh Small Finance Bank | 2-3 Years | 8.50% |
For Senior Citizens:
| Small Finance Bank | Tenure | Interest Rate (%) |
| AU Small Finance Bank | 18 Months | 8.50% |
| Equitas Small Finance Bank | 888 Days | 9.00% |
| Esaf Small Finance Bank | 888 Days | 8.88% |
| Jana Small Finance Bank | 1-3 Years | 8.75% |
| Northeast Small Finance Bank | 18 Months-3 Years | 9.00% |
| Suryoday Small Finance Bank | 5 Years | 9.10% |
| Ujjivan Small Finance Bank | 18 Months | 8.75% |
| Unity Small Finance Bank | 1001 Days | 9.10% |
| Utkarsh Small Finance Bank | 2-3 Years | 9.10% |
(Note: These rates are subject to change. Check with the respective bank for the latest rates.)
How Safe is an FD in a Small Finance Bank?
Small Finance Banks are licensed and regulated by the Reserve Bank of India (RBI), ensuring their operations follow strict guidelines. However, before investing, consider the following:
- Deposit Insurance: Like other scheduled banks, deposits in Small Finance Banks are insured up to ₹5 lakh per depositor under the Deposit Insurance and Credit Guarantee Corporation (DICGC) scheme.
- Bank’s Stability: Check the financial health, credit ratings, and performance history of the SFB before investing.
- Liquidity Issues: SFBs have smaller deposit bases, making them slightly more vulnerable to financial crises than larger banks.
- Loan Defaults: Since SFBs lend to customers with low credit profiles, they face a higher risk of loan defaults. However, their diversified lending models help in risk management.
- Reputation and Track Record: It’s better to choose well-established Small Finance Banks with a stable history rather than newly established ones.
Things to Check Before Investing in an FD at an SFB
If you’re planning to open an FD in a Small Finance Bank, keep these points in mind:
- Interest Rate Trends: Compare interest rates across multiple banks to get the best deal.
- Withdrawal Rules: Understand premature withdrawal policies and penalties.
- Bank’s Performance: Check ratings from agencies like CRISIL or ICRA.
- Online Services: Ensure that the bank provides easy digital access to your FD account.
- Diversification: Instead of investing all your money in one SFB, consider splitting it across different banks for safety.
Who Should Invest in Small Finance Bank FDs?
- Investors looking for higher returns on short-term and medium-term deposits.
- Retired individuals and senior citizens who want better interest rates for regular income.
- People with a low-risk appetite but willing to diversify their investments.
- Those who can monitor and track the financial stability of the bank regularly.
Final Note: Small Finance Bank FDs offer an attractive opportunity for investors seeking higher returns. However, one must weigh the benefits against the risks and make an informed decision. Always check the latest interest rates, DICGC coverage, and the bank’s stability before opening an FD.
