Is keeping fixed deposits with small finance banks a safe bet?

Is keeping fixed deposits with small finance banks a safe bet? Are fixed deposits the safest option if the world sees another global recession in 2023? -MF Basha, Bangalore

Fixed deposits are a time-tested favourite. The Great Recession of 2008, after the bursting of the US subprime crisis, proved too harsh and costly for many Indians. Unfortunately, most people were not amenable to financial planning, including employees, businesspersons, and senior citizens. We must look for innovative ways to generate income and, on the other hand, curtail unimportant expenses. There seems to be a fragile thread of hope. Whenever there is a recession or economic uncertainty, equity investors shift their investments from the equity markets and park in the time-tested fixed deposits since fixed deposits are deemed the safest and most dependable.

Always do a bit of research and compare interest rates before parking your money in fixed deposits. Check which bank is offering the highest interest rates. Surprisingly, Small Finance Banks (SFBs) offer higher interest rates on fixed deposits than scheduled private and public sector banks. It is an arduous task for small finance banks to source funds. SFBs will have lower credit ratings than larger banks. As a result, most of the available options for sourcing funds are always costly for SFBs and often come with a price.

On the other hand, banking behemoths enjoy higher credit ratings. The ratings are a few notches above the smaller banks. In the case of PSU banks, they always have privileged access to and support from the Government of India. Hence, these behemoths have an advantage and edge over money markets. The cost of sourcing funds through money markets is more expensive for SFBs than for giant banks. The options for sourcing funds at lower rates either do not exist or are very limited for SFBs.

Consequently, Small Finance Banks offer competitive interest rates on deposits to woo customers. This strategy also helps smaller banks to attract more customers and build a robust customer base. It is essential to compare and contrast.

Tenure and maturity are vital. Fixed Deposits come with a predetermined period with various tenure options ranging from 7 days to 5 or more years. Hence, it would be best if you compare apples to apples. It would be best to thoroughly research how much interest rate two banks offer for the same tenure. Customer service is secondary, especially in the internet and online banking age. There is no human touch these days in banking transactions and during the Covid-19 pandemic. The customer journey spans digital transactions. Nevertheless, on the flip side, SFBs have fewer branches. The smaller banks' digital technology is less robust and customer friendly than larger banks.

Irrespective of the size and status of the bank customers, fixed deposits are safe in all scheduled banks, including Small Finance Banks. The customers will be able to get up to Rs 5 lakh deposit insurance amount in case of a financial scam or closure of a bank. Customers will benefit from withdrawing their deposits up to the deposit insurance amount maximum limit of Rs five lakh. All customers who keep deposits are insured under the 'Deposit Insurance and Credit Guarantee Corporation Act 1961. Every customer is protected against risk and loss to the principal under the DICGC in the case of the bank's failure, liquidation, merger, amalgamation, or shutting down. Customers get protection or cover on all deposits, including savings, term, fixed, current, and recurring deposits.

What if you maintain multiple accounts? Both single and Joint Accounts are treated separately and protected under the DICGC Scheme. For instance, a customer holds a savings account and another account jointly operates with the spouse. Both accounts are maintained with the same branch or with two different bank branches of the same bank. The customer is entitled to protection or covered up to Rs. Five lakh each on both the savings account and the joint account.

What if you have deposits with different banks? There is a limit on the amount of deposit insurance from DICGC Scheme. However, the limit is applied separately to deposits in different banks. If a customer has five lakh and four lakh deposits maintained with two different banks, he is covered for nine lakh. The customer can maintain multiple accounts and deposits with different banks. A limit of five lakh is applied to each bank. The customer will be insured up to Rs five lakh only in deposits maintained with different or multiple branches of the same bank.

(The author is a Sebi-licensed Research Analyst. The alumnus of the Indian Institute of Foreign Trade (IIFT), he had held leadership roles at National Geographic, Reliance Radio Television Luxembourg, STAR TV, etc) ­