Small Finance Banks Offer Higher Interest Rates On Deposit. 5 Things To Know

The aim behind small finance banks is to provide financial inclusion to sections of the economy not being served by other banks.

Banking & Financial Services | Written by Anshul | Updated: June 08, 2018 21:46 IST

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Small Finance Banks Offer Higher Interest Rates On Deposit. 5 Things To Know

As new entrant, the brands of small finance banks are not yet established.

Small finance banks generally offer higher interest rates as compared to many leading banks in India. Small finance banks are niche banks which provide financial inclusion to small businesses, micro and small industries, and marginal farmers, among others. The aim behind small finance banks is to provide financial inclusion to sections of the economy not being served by other banks. Some of the popular small finance banks are Ujjivan small finance bank, AU small finance bank, Equitas small finance bank, Fincare small finance bank, among others.

Here are 5 things to know about small finance banks in India:

Higher interest rates: As new entrant, the brands of small finance banks are not yet established. Therefore to attract public they pay higher interest rates as compared to other established banks. For example, Ujjivan small finance bank offers FD interest rate of 8 per cent on its one-year fixed deposits (FDs). Fincare small finance bank offers 8 per cent on its one-year fixed deposits (FDs). Another small finance bank Equitas offers as much as 7.75 per cent on its fixed deposits. These interest rates are better than those offered by many of the leading banks of the country.
Safety concerns: All banks are regulated by Banking Regulation Act, 1949 and they have to manage their funds and capital as per strict guidelines. According to Anil Goyal, practicing CA and promoter, Meri Punji IMF Pvt Ltd, "It is very challenging to get banking license in India. Only very sound proposals on finances get the licenses and their operations are scrutinised very closely. This means that any money lent to these small finance banks (deposited with them as deposits or savings account) is as safe as any other bank in the country."
Status and condition: Small finance banks are not very popular among people. "For opening a bank account, people generally prefer location convenience and safety (which is in our mind) over higher returns (which are not substantial and only marginal). This means the extra return offered is not commensurate with the extra perceived risk attached to such small banks and therefore people are still hesitant to go to them", said Mr Goyal.
Financial inclusions:Small finance banks are new entrants to trade. Their terms are better and liberal for borrowers. Accordingly, any small business and similar trade people, to whom leading banks do not show interest, get better attention and loan potential from small finance banks subject to their project details being acceptable.
Challenges: Small finance banks have to compete with existing public sector banks. They are specialised in micro lending operations with limited exposure to banking operations. The cost of deposit mobilisation is higher for these banks as they cover rural and under served segment.