Are Small Finance Bank Deposits Safe?
Ketki Jadhav
Jul 15, 2022
Listen to Are Small Finance Bank Deposits Safe?
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A couple of days back, I went to attend a family function where I joined a bunch of my relatives discussing Falling Saving Accounts and Fixed Deposits interest rates. One of my uncles was advising others to start deposits in any Small Finance Bank (SFB) as he had been banking with a Small Finance Bank that offered attractive interest rates on Savings Bank Accounts as well as Fixed Deposits. However, many others, including my grandmother, expressed their concerns about the safety of depositing in SFBs. My grandmother turned to me and asked - what do you think, Ketki? Are Small Finance Bank Deposits safe?
Well, if you are looking for a one-line answer to this question - then yes, the Small Finance Bank Deposits are as safe as any other banks.
However, contrary to what my uncle said, the SFBs have started to reduce the interest rates offered on Savings Accounts and Fixed Deposits. But yes, although the interest rates are not very attractive, they are still high compared to other banks.
Let's first understand what Small Finance Banks are,
Small Finance Banks (SFBs) are a type of niche banks governed by the Reserve Bank of India (RBI). These banks are allowed to provide basic banking services like accepting deposits and lending funds, with the primary objective of financial inclusion by serving the unserved sections of the society, such as small business units, small and marginal farmers, micro and small industries, and unorganised sector entities.
The RBI mandates the SFBs to lend at least 75% of the loans to priority sectors, and at least 50% of the loans need to be below Rs 25 Lakhs. They typically lend money to the section of society that is not favoured by the big and established banks, making the loan books riskier compared to other commercial banks.
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Although SFBs are regulated by the RBI, which regulates the entire banking segment in India, individuals being susceptive while depositing huge money is coherent as it is a relatively new banking segment.
However, the SFBs have to adhere to the rules and regulations of the RBI, like any other bank. They are required to follow the Statutory Liquidity Ration and Cash Reserve Ratio, which ensures they set aside 22.25% of their deposits. Moreover, they have to maintain the Capital Adequacy Ratio of 15% and are not allowed to lend more than 10% of their capital to a single borrower.
Most importantly, the SFB deposits are covered under Deposit Insurance and Credit Guarantee Corporation (DICGC) insurance cover that insures principal and interest up to a maximum of Rs 5 Lakhs in the same right and same capacity as on the date of liquidation. This insurance cover is offered to the deposits made in commercial and cooperative banks registered with DICGC. It insures all the deposits, such as savings, current, fixed, recurring, etc.
While all these safeguards ensure sustainability in normal conditions, there could be abnormal circumstances that can hit these banks. For example, SFBs had the highest impact of covid-19 conditions as the businesses were setback due to the lockdown, and the government had mandated to offer a moratorium period of six months. Since these banks provide loans to small and unorganised businesses, the majority of the borrowers had opted for the moratorium. Currently, the economy is facing many risks, such as constantly increasing inflation, a sharp decline in the Indian Rupee, Russia-Ukraine geopolitical tension, and bankruptcy of Sri Lanka and Pakistan, which can further impact the banking sector.
Considering all the facts, it makes sense not to put all your eggs in one basket. You can diversify your portfolio by investing in different financial instruments of different financial institutions. If you are looking for higher returns and willing to take low to moderate risks, you can consider investing in debt mutual funds that can offer comparatively higher returns to your short to medium-term financial goals.
When investing in Fixed Deposits in Small Finance Banks, it is advisable to put only a portion of your FD funds in each bank that you can DICGC insurance cover for. The same strategy should be applied when investing in other commercial and cooperative banks. Since lately there has been an increase in the number of banks failing, it is crucial to segregate your funds smartly. Click here to know more about how you can maximise the DICGC insurance cover by investing in different rights and capacities. Although you might find it difficult to reconcile all the Fixed Deposits, it will provide security to your hard-earned money and, more importantly, peace of mind to you, the depositor.
Warm Regards,
Ketki Jadhav
Content Writer