Fixed Deposit: Considering the higher interest rates compared to mainstream banks, making an FD in a small finance bank is an attractive option, but it is wise to evaluate the financial health of the bank before investing.
Fixed Deposit (FD) is an important means of traditional investment. It provides guaranteed returns. For better returns, banks or other financial institutions offer attractive interest rates. Many times people also make FDs in small finance banks for better returns. Obviously, here you will get fixed returns on a fixed amount. But have you ever wondered how safe is the FD you have made in a small finance bank, apart from a bank or post office? Yes, it is important to understand this. Small finance banks often offer higher interest rates to attract more customers. Some small finance banks are offering interest rates of up to 9.5% on FDs to senior citizens, which is much higher than the interest rates offered by major banks. Let us look at some of the things that you should know before making an FD in a small finance bank and decide to invest only after examining these things.
Regulation
Like big banks, small finance banks are also financial institutions regulated by the Reserve Bank of India. Being regulated by RBI, small finance banks also have to work according to strict guidelines. This is the reason why depositors of small finance banks get trust and security.
Deposit Insurance
Deposits are insured under the Deposit Insurance and Credit Guarantee Corporation. It provides uniform insurance coverage of up to Rs 5 lakh to every depositor in every bank. This insurance guarantees a safety net for small depositors. Nevertheless, an investor should be cautious and evaluate specific parameters to ensure the financial health of the bank before investing.
Capital Adequacy Ratio
A strong capital adequacy ratio clearly reflects the bank’s ability to absorb losses, thereby reducing the overall risk of default. Sustainable levels of NPAs are also important, as they directly impact the bank’s liquidity position and risk of default.
Stable management team important
An experienced and stable management team with proper succession planning is important, as the absence of strong governance can lead to inconsistent performance. Credit rating represents the overall financial well-being of the bank considering all tangible and intangible factors. Considering the higher interest rates compared to mainstream banks, making an FD in a small finance bank is an attractive option, but it is wise to evaluate the financial health of the bank before investing.
