How small fin banks are paying more

Rahul has received Rs 5 lakh on maturity of his life insurance policy. He wants to invest this money without any risk. The State bank of India is offering 6.5 percent interest on 5-year FD. but on the other hand, interest of up to 9.1 percent is being offered on 5 year FDs of a Small Finance Bank. That is, additional 2.6% is being offered. But there are many questions on it
– Is it okay to have FD in Small Finance Bank?
– How are Small Finance Banks giving more interest than the big banks of the country?
– Will the major investment made in Small Finance Bank be safe or not?
Just like these questions arising in Rahul’s mind, you should also understand what are these small finance banks and why do they get better returns in their FDs?

Is it okay to have FD in a Small Finance Bank?
There should not be any concern regarding the security of the deposits with the Small Finance Bank, as they are regulated and get licence from the Reserve Bank of India. In order to promote banking services in the country, it was announced in the Union Budget of 2014-15 to start Small Finance Bank. At present there are 12 working small finance banks in the country. These are small category banks and their scope of business is limited. But just like big banks, they provide savings account, current account, FD, RD and loan facilities. Although in the case of giving loans, small finance banks can give loans only up to a limit.

Higher interest
How are small finance banks giving more interest than the big banks of the country?
The big banks are offering up to 7 percent interest on five-year FDs, but most of the small finance banks are paying more than 7 percent interest. Banking expert Suresh Bansal says that RBI has no control over the interest rates of banks’ savings accounts and FDs. Banks can decide the interest rates on their own. Small finance banks manage better with less staff and limited resources. Through modern technology, these banks also take more work from their staff. Because of this, their operating cost comes down. On this basis, these banks are offering more interest than the bigshots of the country.

Are SFBs safe
So, how safe is making major investment in a Small Finance Bank?
Like big banks, small finance banks are also under the control of RBI. That’s why the chances of losing money in these banks are very less. Like big banks, in small finance banks too you get Deposit Insurance and Credit Guarantee Corporation (DICGC) insurance on amount up to five lakh rupees. DICGC is a subsidiary of RBI. So, your money in a Small Finance Bank is as safe as in big commercial banks.

So.,How much return can Rahul get?
Rahul’s questions have been answered, now understand the math behind his returns. If Rahul invests five lakh rupees in a five-year FD in SBI, then he will get Rs 6.90 lakh on maturity at the rate of 6.5 percent per annum, if the same amount is invested in a five-year FD of Suryoday Small Finance Bank, then according to 9.1 percent interest, Rs 7.84 lakh will be received on maturity after five years. Small finance bank is giving higher return of Rs 94,000 as compared to big bank. This return is 40 percent more than that of SBI.

Small Finance Banks are regulated by RBI, so there is no risk on the principal amount of the investment…also small finance bank wins in giving you better returns.