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Should you invest in an FD by small banks?

While these banks give higher interest rate, it is important to consider other factors such as presence of bank branches and their history.

If you look around, you will find different types of banks. There are some banks that you are familiar with and there are other banks that are limited in numbers and do not have a widespread presence. These banks are called small finance banks and have limited presence in few select locations. Some of these small finance banks are Jana Small Finance Bank, Capital Small Finance Bank, Equitas Small Finance Bank and Ujjivan Small Finance Bank etc.

On September 2015, the RBI granted license to 10 small finance banks. And they give high interest rate on their fixed deposits. These banks make sure that in all their communication and marketing campaigns, the high interest rate does all the talking.

You may ask why there are small finance banks when there are already so many big PSU and private sector banks. The objective of these small finance banks is to expand financial services to unbanked sections of the society. The customers mostly work in the unorganised sector as labourers etc. Just like other banks, these banks are also regulated by the RBI.  

The interest rate on the fixed deposit is one of the main features that attract any customer to the bank. These banks offer higher interest rates as they need deposits to expand their lending business.  Jana Small Finance Bank gives interest rate of up to 8.60% on their FDs. On the other hand, the largest bank in the country, SBI gives interest rate of up to 7%.  

While the interest rate given by these banks are attractive but should you open an FD with these banks.

Should you open an FD with a small saving bank?

The prevalent fear that exists in the minds is what will happen if the banks shut down. The possibility of a shut down is possible but that is possible with other banks as well. However, closure of these banks is a little far fetched as these banks are tightly monitored by the RBI. Moreover, deposits of more than Rs.1 lakh which includes savings, recurring deposit and fixed deposits are insured by Deposit Insurance and Credit Guarantee Corporation (DICGC). Similar is the case with other banks. It is important to check whether the small bank that you have your eye on is insured.

The customer service is also other factor that you need to keep in mind is the customer service. While opening of the fixed deposit can take place through online banking and most of the banking services can take place through online banking, the presence of a physical bank is helpful. These banks don’t have high penetration in the different cities of the country. It is only present near their place of their origin. Hence, if you tend to move about a lot, opening these fixed deposits may not be a great idea.

If we see the track record of these banks, these banks have been in business for only a few years. These institutions were earlier microfinance institutions which allowed them to disburse loans. Hence, they are relatively new in gathering deposits. Experts also say that these banks may need to evolve and strengthen their credit practices.    

Hence, you should not just look at the high interest of the FD given by these banks, the other factors should also be considered. If you want gain from the high interest rate, you can invest a small portion in this FD. Make sure to diversify your portfolio and not concentrate your portfolio with these fixed deposits.


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