A bank fixed deposit is one of the most favoured avenues among senior citizens. It earns a fixed, predictable interest, enabling them to manage their cash flow and liquidity needs during their golden years while offering a sense of financial security.
However, after the RBI cut the policy repo rate by 125 bps in 2025, term deposit rates also declined. By late 2025, senior-citizen FD rates at major commercial banks had fallen by 30 to 70 bps, affecting the income they generate from interest and prompting many to look at other investment avenues.
Among these alternatives, senior citizens are increasingly parking money in fixed deposits with small finance banks (SFBs) because they offer better rates than major banks.
Some SFBs are offering up to 8.25% p.a. on a 30-month deposit for senior citizens, while some major banks are offering 6.90-6.95% for the same tenure. That's a difference of around 1.30%. While major banks offer better rates on longer-tenure deposits, they still lag SFBs. It is easy to see why senior citizens are considering SFBs over larger banks.
Going forward, if the RBI raises the policy repo rate — which remains possible given inflation risks — SFBs may offer even better rates than major banks.
What Are SFBs?
SFBs undertake basic banking activities, including accepting deposits and lending to underserved sections such as small business units, small and marginal farmers, micro and small industries, and entities in the unorganised sector.
They are governed by the Reserve Bank of India (RBI) and must follow the same rules and regulations as any other bank.
The RBI mandates that SFBs lend at least 75% of their loans to priority sectors, and at least 50% of those loans must be below Rs 25 lakh. They typically lend to sections of society not favoured by large banks, making their loan books riskier than those of major commercial banks.
Nonetheless, they are required to maintain the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) at 4.5% and 18%, respectively, of their Net Demand and Time Liabilities (NDTL), just like other banks.
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Is There DICGC Coverage For Deposits?
Yes. Every depositor is insured for both principal and interest under the Deposit Insurance and Credit Guarantee Corporation (DICGC) scheme up to Rs 5 lakh per bank, providing a safety net similar to that of any public or private sector bank.
Deposits held across different branches of the same bank are aggregated for insurance coverage of up to Rs 5 lakh. However, deposits held in the ‘same capacity and same right' and those held in a ‘different capacity and different right' are treated differently and may qualify for separate coverage.
For example, if Mr A has a term deposit in his individual name, is a partner in a firm, and also has a joint account with Mrs A in one or more branches of the same bank, these are considered deposits held in a ‘different capacity and different right' and qualify for separate insurance coverage of up to Rs 5 lakh each.
If individuals hold multiple joint accounts in the same order of names across one or more branches, those accounts are treated as being held in the ‘same capacity and same right'. Their balances are aggregated to determine the insured amount, subject to the Rs 5 lakh limit.
However, if the order of names differs or the group of account holders changes, those deposits are considered held in a ‘different capacity and different right'. In such cases, separate insurance coverage of up to Rs 5 lakh is available for each account.
Deposits here include savings accounts, fixed deposits, recurring deposits, and current accounts. The deposit insurance scheme is compulsory, and no bank can opt out.
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What Depositors Need To Be Cautious About
Given the nature of their lending, SFBs typically carry higher risk. During the COVID-19 pandemic and the subsequent slowdown, many SFBs faced severe asset-liability mismatches as borrowers opted for moratoriums.
Even now, risks remain. The conflict in West Asia is disrupting supply chains, raising freight and input costs, and straining small businesses. Rating agencies such as ICRA and CRISIL have warned that these disruptions could lead to higher non-performing assets (NPAs) among small businesses.
Likewise, the possibility of a deficient southwest monsoon in 2026 due to strong El Niño conditions could weigh on the farm sector, pressure farmers' incomes, increase NPAs, and tighten the credit cycle for SFBs.
As a result, SFBs could again face asset-liability mismatches, creating liquidity pressures and risks for depositors.
The Approach To Follow
Keep in mind that if an SFB — or any other bank — offers an extraordinarily high interest rate on deposits, it often comes with higher risk.
Before investing, assess the bank's financial health. Key indicators include the capital adequacy ratio (higher is better), non-performing assets (lower is better), provision coverage ratio (higher is better), credit-deposit ratio, and net interest margin. It also helps to review ratings assigned by independent credit rating agencies. A high rating, such as AAA or AA, along with a stable outlook, is generally preferable.
You should also evaluate the bank's corporate governance practices. While the RBI regulates the banking system, governance standards remain important for depositor protection.
From an asset-allocation perspective, around 15-20% of a fixed-income portfolio may be allocated to SFB fixed deposits after proper due diligence. Senior citizens should avoid investing a large portion of their savings in SFBs solely for higher interest rates.
A fixed deposit laddering strategy can also help. Instead of investing the entire amount in one FD, spread investments across different maturities—such as six months, one year, two years, and three years. This can improve liquidity while helping investors benefit from changing interest-rate cycles.
Invest sensibly, be a thoughtful investor.
Happy investing!
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