Synopsis: Small finance banks have raised their fixed deposit rates to over 8%, competing with major banks like SBI and HDFC Bank. The move comes as alternative investment avenues grow, pulling savers away from traditional deposits. The financial market is facing a mismatch between fund demand and availability due to RBI’s monetary stance, further driving competition.
Small finance banks (SFBs) have been aggressively raising their fixed deposit (FD) rates, offering over 8% for two-year tenures in an effort to attract depositors amid stiff competition from larger banks like SBI and HDFC Bank.
This move comes as alternative investment options have grown, drawing savers away from traditional bank deposits.
Notably, some finance companies are also joining the race by offering similarly high returns.
Several SFBs, including Utkarsh Small Finance Bank (SFB), Suryoday SFB, Equitas SFB, and Unity SFB, have increased their FD rates significantly.
Utkarsh and Suryoday SFBs are offering 8.5% for two-to-three-year deposits, while Equitas SFB is providing 8.5% for a two-year tenure.
Unity SFB, however, has gone a step further by offering 9% interest for a tenure of 1,001 days.
In contrast, larger banks like SBI and HDFC Bank are offering relatively lower rates, with SBI's highest rate at 7.25% for a 444-day tenure and HDFC Bank’s highest rate at 7.4%.
Additionally, these banks provide an extra 50 basis points for senior citizens.
According to Kanika Pasricha, Chief Economic Advisor at Union Bank of India, deposit growth has been lagging, which has intensified the competition among banks since July.
Borrowings through infrastructure bonds have seen a sharp rise, and the overall financial market is experiencing a mismatch between the demand for and availability of funds.
The Reserve Bank of India’s (RBI) tightening monetary policy, aimed at bringing inflation down to the target 4%, has added further pressure on deposit growth.
Furthermore, the democratization of equity culture in India, driven by strong returns from growth assets, has drawn savers towards pooled investment vehicles such as mutual funds and exchange-traded funds (ETFs).
This shift has reduced the pool of funds available for traditional bank deposits.
Not only are SFBs competing, but some non-banking financial companies (NBFCs) are also offering attractive FD rates.
For instance, Manipal Housing Finance Syndicate Ltd is providing 8.25% for one-to-three-year deposits, while Bajaj Finance is offering an impressive 8.65% for a 42-month tenure.
In conclusion, in an increasingly competitive environment, small finance banks are leveraging higher FD rates to attract depositors, filling a gap left by traditional banks and drawing attention in a market where alternative investment options abound.
While this strategy may help secure more deposits in the short term, the broader trend of savers moving towards higher-return investment vehicles could challenge traditional deposit growth over time.
Disclaimer: This article is for informational purposes only and should not be considered financial advice. Readers are encouraged to consult a certified financial advisor before making any investment decisions.
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