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New, small banks are offering higher fixed deposit rates. Should you invest?

Larger banks are offering interest rates lower than even the small savings rate.

business Updated: Jan 31, 2017 10:35 IST
Vivina Vishwanathan

What do you get on your one-year fixed deposit (FD)? If you bank with the older and large commercial banks, you would have seen rates falling over the past two years. For instance, State Bank of India (SBI), the country’s largest lender, currently pays an interest rate of 6.90% on one-year FDs. Private sector banks, including ICICI Bank Ltd and HDFC Bank Ltd, pay the same. In comparison, Navi Mumbai-based Suryoday Small Finance Bank Ltd, which started operations on January 23, is offering 9%.

According to a Religare Capital Markets report, Utkarsh Small Finance Bank Ltd and Equitas Small Finance Bank are offering 8.25% to 8.75%. And newer universal banks such as Bandhan Bank Ltd offer a higher interest rate than larger banks at 7.25% to 8% for 1-2 year fixed deposits.

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In fact, larger banks are offering interest rates lower than even the small savings rate. For instance, a five-year post office time deposit offers a 7.8% interest rate, while SBI pays 6.50% on a deposit of the same maturity. So, should you put your money in small/newer banks?

Interest rate difference

New and small banks are currently offering higher interest rates than old banks because they want to increase their customer base. “The old banks are flush with funds after demonetisation. They don’t have anywhere to deploy the funds. Also, in keeping with a new rule, small banks have to decrease their inter-bank borrowing,” said Pritesh Bumb, an analyst at Prabhudas Lilladher Pvt. Ltd. Bankers say that newer banks are positioning themselves differently.

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“The bigger banks have large customer base and reach. Every bank has built its customer franchise in a different way. Younger banks don’t have a huge legacy of branches and customers; they have to use different approaches, rates being a primary driver, to build a customer base. Also for consumers, the ability to switch banks is far easier now,” said Rajeev Ahuja, head strategy, RBL Bank Ltd.

Which one should you choose?

If you are looking to put money in FDs, don’t just look at interest rates; customer service is equally important. It may not be wise to put your money in a bank, which does not have enough access points. However, in the age of technology, most banks allow you to book as well as withdraw FDs online. Whether it is a small bank or a bigger one, FDs are relatively low risk compared with other products. You get a protection cover on your deposit for those up to R1 lakh.

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This protection is provided by Deposit Insurance and Credit Guarantee Corp, a subsidiary of the Reserve Bank of India. It insures all bank deposits, including savings, fixed, current and recurring, against the risk of loss arising from a bank failure. So, even if your bank gets liquidated, your deposits up to R1 lakh are safe.

Financial planners, too, advise looking beyond interest rates. “Don’t go overboard with the new banks. If you want to invest, limit your exposure to 25% in the new bank. These new banks may do well in future. But we still need to see a track record,” said Suresh Sadagopan, a Mumbai-based financial planner.