FDs of Small Finance Banks vs Commercial Banks: Which one should you go for?

Mumbai: Small Finance Banks (SFBs) offer more interest on Fixed Deposits than commercial banks. In reality, a few of the SFBs are giving interest rate up to nine per cent on their regular FDs and offering 9.5 per cent in case of senior citizen FDs, which is very attractive, especially in the current falling interest rate rule when even leading commercial banks are giving 7.25 per cent on FDs, according to The Financial Express.

Though, before getting tricked by the higher interest rates being offered by small finance banks on their FDs, the key question to inquire is: “Are these FDs a good bet? Or, should I still go for a commercial bank FD?”

It is not easy to answer these questions since the investment choice depends on one’s risk taking ability. For example, on the off chance that you're a risk-averse investor who is watchful of taking any risk, at that point the fixed deposits being offered by leading banks should be your choice. In case, if somebody is willing to take a few risks for higher returns, at that point he can effectively go for the FDs of SFBs.

Being a special category of commercial banks, SFBs were basically made to cater to areas which were not served or underserved by the banking sector. However, since SFBs are new in business, most of the investors are bound to have concerns regarding their presence, in spite of their higher rate of interest in comparison to other commercial banks, says Industry expert.

“Given the past track record of the government and the RBI in dealing with bank failures, such fears are ungrounded. As of now, 8 out of 10 SFBs have been included in the Second Schedule of the RBI, which makes them equally safe as other commercial banks. Banks listed in the Second Schedule are covered under the depositor insurance program of Deposit Insurance and Credit Guarantee Corporation (DICGC). This insurance covers deposits in current and savings account, as well as fixed and recurring deposits, for up to Rs 1 lakh per depositor per bank in case of bank failure,” says Naveen Kukreja, CEO & Co-founder, Paisabazaar.com.

A few financial specialists, however, are of the view that risks to the loan portfolios of small finance banks are much higher than the ones managed by bigger banks. Subsequently, the eagerness of a marginally better return on fixed deposits should not draw you towards them.

 “Usually the part of your savings put in fixed deposits is the one where you do not wish to have any risk or chance of loss. Therefore, do not take any chances and always put the risk-free part of your portfolio only with the FDs of frontline banks. Wherever you are comfortable with risk and wish to go for higher returns, then invest in equities or other high growth assets. There at least you will get a high return commensurate with the risk taken,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.