Is it wise to invest in Small Financial Banks that provide attractive interest rates? Expert View

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Equitas Small Finance Bank has hiked its interest rate on deposits between ₹1 lakh and ₹ 5 crores to 7% from 5.5%, with effect from 10th of June. Interest rates provided by banks on savings accounts as well as fixed deposits have been falling as the Reserve Bank of India (RBI) has been cutting policy rates. But small finance banks (SFBs) continue to offer relatively higher rates amid this falling interest rate environment and thereby are getting huge attraction from customers.

A huge amount of bank deposits is one reason for banks to cut deposit rates, and this is exactly what has happened. Given the uncertainty in the share markets, Indian investors have rushed to move their savings to what is considered as the most reliable and safe instrument for investment: fixed deposits (FDs). This led to many banks to cut interest rates to 5-6% as the banks may not be able to provide high-interest rates for such a large number of customers. For example, the State Bank of India (SBI) is now offering an interest of 5.4% on a fixed deposit with a tenure of five years and above.

So how do SFBs continue to offer high-interest rates and even hike the interest rates in such an economic situation? According to Murali Vaidyanathan, president and country head, Equitas Small Finance Bank, their business model is different from that of commercial banks, and the core of their model is to expand their customer base. He said that offering a better value proposition than large commercial banks during this time is critical for consumers as a whole, wherein, all savers and investors are looking for reliability, consistency, and safety of their money as a way of life. So, this opens a door of opportunity for all segments from senior citizens to salaried employees to professionals across to make investments backed by attractive returns and safety.

The SFBs don’t have a huge customer base that most large commercial banks do, SFBs have very less amount of deposits from customers because of this. Therefore, they are trying to offer higher deposit rates to attract potential customers and build up their deposits. As they gain higher deposits and their cost of funds goes down, then they may also reduce the interest rates provided for deposits.

People are generally less attracted to SFBs in comparison with large commercial banks because of their safety concerns. But it is important to remember that both SFBs and large commercial banks have the same regulator that is RBI. Adhil Shetty, CEO, Bank Bazaar said that considering the current economic situation it is best if an investor diversifies the investment into different channels. Of the total fund, a person intends to invest in fixed deposits not more than 20% should be invested in small banks. Each depositor must carry out their own research before investing in FDs offered by small banks.

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