How are SFBs Offering Higher FD Interest Rates Than Larger Commercial Banks?

Small Finance Banks (SFBs) have gained popularity among retail investors for FD investments due to their rising interest rates. If you compare the interest rates offered by small finance banks to large commercial banks, you will find that SFBs offer 1-2% higher interest than large commercial banks.

SFBs need a more extensive customer base of established commercial banks. Hence, they must provide attractive deposits to attract potential FD customers and increase the customer base.

For example, HDFC offers 7% interest per annum for deposit tenure ranging from 2 years 1 day to 2 years 11 months. At the same time, Fincare Small Finance Bank is offering 8.61% interest per annum for a tenure of 2 years and 20 days. This raises the question of how SFBs can offer higher interest rates than larger commercial banks.

In this article, we will find the answer to the above question and whether you should park your hard-earned money in small finance bank FDs. 

Digital Penetration and Low Operational Cost

By embracing digital technology, SFBs are bridging the gap between traditional banking and marginalised communities through digital platforms. These empower customers in remote areas to manage their finances and carry out banking activities without physical branch visits. This approach promotes financial inclusion and enhances the efficiency of banking services for people in remote areas.

Additionally, going digital and having very little branch presence in urban areas reduces the infrastructure cost of small finance banks. Since SFBs can reduce the cost to such an extent, they can pass the benefit through higher interest to their customers.

Micro-financing and Banking to the Underbanked

Digital financial inclusion extends beyond traditional banking services to provide broader financial support. Small finance banks are actively involved in microfinance programs. They offer loans and financial help to, farmers, small businesses and micro-entrepreneurs. These individuals and organisations struggle to get loans through traditional credit channels as they don’t have a banking history.

Since SFBs offer unsecured loans to these individuals and enterprises, they charge much higher interest on loans than large commercial banks. For example, ICICI Bank offers personal loans at 10.5% interest onwards, while Ujjivan Small Finance Bank offers loans starting from 22.9% interest rate. That is a whopping 12.4% difference in interest rates. Hence, they can transfer the benefit of higher interest to depositors.

Streamlined Loan Application Process

By harnessing the digitalisation process, these banks simplify the loan application and expedite the approval procedures. This enables micro-entrepreneurs to access the necessary funds and expand their businesses.

DICGC Cover

Before you compare how safe your fixed deposits with small finance banks are vs the large commercial banks, please remember SFBs are also covered by the DICGC insurance scheme. This means that your fixed deposits (FDs) of up to Rs 5 lakh are protected in SFBs like they are protected in large commercial banks. Moreover, if a bank fails, you will be guaranteed to receive the insured amounts within 90 days under the Deposit Insurance and Credit Guarantee Corporation (DICGC) scheme. This applies to all accounts, including savings, current, and recurring accounts. 

SFBs are Regulated Like Established Commercial Banks

SFBs are regulated by the RBI in the same way as larger commercial banks on both the lending and depositing front. It enforces the following strict regulations to ensure the financial stability of SFBs.

• Capital Adequacy Ratio (CAR): SFBs must maintain a minimum CAR of 9%, just like commercial banks. This ensures they have sufficient capital to cover potential losses and maintain financial stability.
• Non-Performing Assets (NPAs): SFBs are subject to the same NPA classification and provisioning norms as commercial banks. This ensures proper identification and management of bad debts, minimising their impact on the bank’s financial health.
• Liquidity Coverage Ratio (LCR): SFBs must maintain a minimum LCR of 100%, ensuring they have sufficient liquid assets to meet their short-term obligations.
• Loan-to-Deposit Ratio (LDR): SFBs have a maximum LDR of 75%, ensuring they maintain a prudent balance between lending and deposit mobilisation.
• Reserve Requirements: SFBs must maintain the same reserve requirements as commercial banks, ensuring adequate liquidity in the financial system.
• On-site Inspections: RBI conducts regular on-site inspections of SFBs to assess their financial health, compliance with regulations, and adherence to best practices.

Additionally, SFBs are subject to the same reporting and disclosure requirements as commercial banks, ensuring transparency and accountability.

Small finance banks have been pivotal in bringing the unserved sectors into the formal banking system. They are bringing financial inclusion and economic opportunities by concentrating their branch network in rural and semi-urban regions to serve the lowest-income segments of society. 

References

https://www.rbi.org.in/commonperson/English/Scripts/Notification.aspx?Id=2282

https://www.rbi.org.in/commonman/Upload/English/Notification/PDFs/NOTI1406072017.PDF

https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10636&Mode=0

https://rbi.org.in/commonman/English/scripts/Notification.aspx?Id=3050

https://rbi.org.in/Scripts/AnnualReportMainDisplay.aspx