Why Small Finance Banks Offer Higher Interest Rates Than Larger Peers

Fincare Small Finance Bank offers interest rates of up to 9% on FDs of 2-3 years (Representational image)
Fincare Small Finance Bank offers interest rates of up to 9% on FDs of 2-3 years (Representational image)

Small finance banks offer higher interest rates than their larger peers. Interest rates on savings accounts, recurring deposits (RDs) and fixed deposits (FDs) of small finance banks are as high as 9 per cent for regular citizens and 9.5 per cent for seniors. Fixed and recurring deposits below Rs 1 crore in State Bank of India (SBI), the country's largest bank, fetch an interest rate of 6.75 per cent for regular citizens and 7.25 per cent for seniors. So how and why do small finance banks offer higher interest rates than larger peers?

History of small finance banks

Small finance banks by design are focused on financial inclusion, and lend to the priority sector consisting of the unbanked and underbanked segments such as the rural poor, small farmers, and micro and small enterprises.

Most small finance banks have converted from microfinance institutions (MFIs) or non-banking finance companies (NBFCs). As NBFC-MFIs, they were not permitted to raise deposits in the form of savings accounts, current accounts and fixed deposits, and instead had to rely on financing in the form of borrowings from banks and financial institutions, at interest rates in the range of 11-12 per cent.

Advantages of small finance banks

High interest rates

Consider this: Fincare Small Finance Bank offers interest rates of up to 9 per cent per annum for fixed deposits, going up to 9.5 per cent for senior citizens, for a tenure of two-three years.

"The ability of small finance banks to offer such higher rates stems from their keenness to build a retail franchise," said R Bhaskar Babu, MD and CEO, Suryoday Small Finance Bank, which offers an interest rate of up to 7.25 per cent on savings bank accounts and up to 8.75 per cent on fixed deposit accounts.

Digital penetration

With a focus on technology and digital banking, small finance banks are able to provide a seamless experience to their customers. Fincare SFB is one of the few banks in the country that offer 101, a digital savings account that can be opened online within five minutes using Aadhaar-based e-KYC (Know Your Customer) or electronic verification. Customers of Fincare's 101 account get their personalized debit cards in a couple of days, including those with a zero balance variant.

"We deliver door-step service according to the convenience of the clients. Also, for the customers, SFBs are as easily accessible (as large banks) as it has more touch points in rural areas," said a spokesperson from ESAF Small Finance Bank.

Small finance banks offer easy access, easy processing and convenient repayment terms of loans.

How are small finance banks able to score over larger lenders?

Most small finance banks enjoy a healthy NPA (non-performing asset) ratio. So depositors need not worry over the safety of their hard-earned money.

"The higher interest rate that customers are able to avail do not come at any higher risks in comparison to large banks. Depositors with SFBs have exactly the same protection that is available to a customer of a large bank," said Rahul Agarwal, director, Wealth Discovery/EZ Wealth.

Small finance banks cannot lend to the corporate segment that has seen a significant spike in bad loans and are not allowed to deal in complex, structured products. "Therefore, the risk exposure of SFBs is significantly lower than that of other banks," said Rajeev Yadav, MD and CEO, Fincare Small Finance Bank.

Digital adaptability has reduced the turnaround time for various activities offered by SFBs and removed the need for paper, thus bringing down the costs considerably. Hence, SFBs are able to reduce costs and are able to pass on those benefits to customers in the form of higher interest rates.

"Established banks are yet to directly foray into the microfinance segment, and their business set up may not allow them to reach this segment, which is as much in need of regular banking services but at their doorstep. This gap is what the SFBs can easily cater to," said R Baskar Babu, MD and CEO, Suryoday Small Finance Bank.