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Small finance banks offer higher rates on fixed deposits; but should you invest?

Small finance banks offer higher rates on fixed deposits; but should you invest?

Small finance banks offer higher rates on fixed deposits; but should you invest?
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By Anshul  Jun 10, 2020 3:19:45 PM IST (Updated)

When it comes to investing, fixed deposits or FDs are one of the most popular schemes because of its risk-free nature.

When it comes to investing, fixed deposits or FDs are one of the most popular schemes because of their risk-free nature. The interest rates offered on FDs are subject to change from time to time, which also varies from banks to banks. Small finance lenders, for example, offer higher interest rates than their larger peers.

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“The highest FD card rate offered by some small finance banks are around 200-300 bps more than the highest FD card rates offered by most PSUs and large private sector banks,” says Naveen Kukreja, chief executive officer and co-founder, Paisabazaar.
If you see comparatively, SBI offers an interest rate of 5.10 percent on FDs of up to Rs 2 crore for a tenor of 1 year, while small finance banks Suryoday and Fincare pay 7.25 percent and 7.34 percent respectively on FDs of same amount and tenor.
Despite the high rates, many investors may think that small finance banks are not safe for making investments.
However, experts say otherwise.
"Depositors with small finance banks have exactly the same protection that is available to a customer of a large bank," explains Rahul Agarwal, Director, Wealth Discovery.
Like other commercial banks, all small finance banks can undertake all basic banking activities including lending and taking deposits.
Depositors in these banks are also insured up to a maximum of Rs 5 lakh for both principal and interest amount held by them. So, even if banks get liquidated, investors' deposits up to Rs 5 lakh are safe.
"Most small finance banks also enjoy a healthy NPA (non-performing asset) ratio. So depositors need not worry over the safety of their money," according to experts.
Additionally, investors should also note that FDs are a relatively low-risk investment option when compared with other products.
"The same case goes for both major and small finance banks," opine experts.
Nevertheless, investors should also consider other factors while choosing FDs such as tenure, credibility, and withdrawal.
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