Small finance bank FDs: higher rates, and the safety question

What a small finance bank is

A small finance bank is a bank licensed by the Reserve Bank of India to serve segments that larger banks often reach less, such as small businesses, micro-borrowers and low-income households. It takes deposits and lends, and it is regulated by the RBI like other scheduled banks, though under a different set of rules from the large commercial banks.

Why they offer higher rates

Small finance banks are newer and less well known, and they need to attract deposits from savers who already have accounts elsewhere. A higher interest rate is their main tool for doing that. They also lend to customers who pay more for credit, which lets them afford to pay depositors more.

The higher rate is therefore partly a marketing cost and partly a reflection that the borrowers they serve are riskier than those of the largest banks. It is worth asking whether the extra return is enough to cover the extra risk you may be taking on.

How safe is the money?

Deposits in small finance banks are covered by DICGC deposit insurance up to the standard limit per depositor per bank, the same as at other banks. Within that limit, your money is protected by the insurance if the bank fails. Above the limit, you rely on the bank's own financial health.

So a sensible way to use an SFB is to keep the amount you deposit within the insured limit. If you have more to invest, consider spreading it across banks. Check the current insured limit on the DICGC website before you decide.

What to check before you deposit

• That the institution is a scheduled bank with an RBI licence and is covered by DICGC. Some finance companies that advertise high deposit rates are not banks and are not insured in the same way.
• Its financial health: capital adequacy, the share of loans that have turned bad, and profitability, which are published in its results.
• Whether the rate applies to the tenure you want, and to which customers, such as senior citizens.
• Premature withdrawal terms, in case you need the money early.

A balanced approach

Many savers hold a mix: the bulk of their safe money with large, established banks, and a portion, kept within the insured limit, at a small finance bank to capture a higher rate. That way you benefit from the extra return without putting a large sum at risk.

This is general information, not personal financial advice. The FD lists on Truely Money rank by interest rate, so check each institution's details before you invest.