look news india
New Delhi/Lucknow. Whenever a common citizen thinks of keeping his hard-earned money safe or making a Fixed Deposit (FD), his eyes often fall on the attractive advertisements of small finance banks. While the big government and private banks of the country offer interest on FD around 6.5 to 7.25 percent, small finance banks offer huge returns of 8 to 9.5 percent. In such a situation, the three biggest questions that arise in the mind of every investor and account holder are what is the real meaning of the word ‘Small’ associated with the name of a small finance bank, how do these banks work differently from normal banks like State Bank of India (SBI) or HDFC, and is it not risky to keep money here because of the high interest? If we delve into these questions on the basis of the strict rules and banking structure of the Reserve Bank of India (RBI), many shocking and very useful facts come to light, which are important for every bank customer to know.
Often people hear the name ‘Small Finance Bank’ and assume that it is a small co-operative bank, microfinance company or non-banking finance company (NBFC), which will have limited capacity and security. But the truth of banking rules is completely different from this. In Small Finance Bank, the word ‘Small’ has been used not for the security, trust or digital facilities of the bank, but for its ‘Target Customers’ and ‘Loan Ticket Size’. The Central Government and the Reserve Bank had started these banks in the year 2015-16 to promote financial inclusion. Their main objective is to provide banking services and loans to small businessmen, marginal farmers, micro and small industries (MSMEs), street vendors and workers in the unorganized sector of the country, to whom big commercial banks do not give loans easily. According to RBI rules, it is mandatory for a small finance bank to distribute at least 50 percent of its total loan portfolio in the form of small loans up to Rs 25 lakh. This is the reason why they are called ‘Small Finance Banks’ because of their focus on small loans and small entrepreneurs.
As a common customer, when you visit a small finance bank branch or use their mobile app, you get all the facilities like savings account, current account, FD, RD, debit card, credit card, UPI, net banking and check book which are available in a big commercial bank. Nevertheless, there are four basic differences between a normal bank (universal bank) and a small finance bank under the regulatory framework of RBI. The first major difference is ‘Priority Sector Lending’ (PSL) i.e. lending to priority sector. While general banks like SBI, PNB or ICICI have to give 40 percent of their total credit (ANBC) to agriculture, small industries and weaker sections, for small finance banks this limit has been fixed at 75 percent. The second difference is that of large corporate loans; Normal banks can give loans to big infrastructure projects and big companies worth thousands of crores of rupees, whereas small finance banks cannot give huge loans to big corporate houses nor can they open any subsidiary without the permission of RBI. The third difference is that of Minimum Net Worth; While opening a normal universal bank requires an initial capital of Rs 1,000 crore, for a small finance bank the RBI has set the minimum net worth limit at Rs 200 to Rs 300 crore. The fourth and most beneficial difference for customers is the interest rates, where small finance banks offer 1 to 2 percent more interest on savings accounts and FDs than normal banks.
The biggest fear in the minds of investors is that if these banks giving high interest go bankrupt, what will happen to their deposits. The direct and clear answer to this doubt is that your money is as safe in Small Finance Bank as it is in any big government or private bank of the country. Small finance banks are not chit funds or co-operative societies, but are licensed directly from the Reserve Bank of India (RBI) under Section 22 of the Banking Regulation Act, 1949. Most of the major small finance banks are ‘Scheduled Banks’ included in the Second Schedule of the RBI. Like normal banks, they also have to maintain cash and gold/government bonds with RBI in the form of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). The most important security cover is that of ‘Deposit Insurance and Credit Guarantee Corporation’ (DICGC), which is a wholly owned institution of RBI. As per rules, each customer’s deposit in a small finance bank up to Rs 5 lakh (including principal and interest) is 100 per cent government insured. That is, God forbid if there is any crisis on the bank due to any reason, still your amount up to Rs 5 lakh remains completely safe and is returned by DICGC. The thing to note is that even in SBI, HDFC or any big normal bank, customers get the same insurance cover up to Rs 5 lakh.
Often this question arises in the minds of people that when the rules are the same, then how are small finance banks able to give 8.5 to 9 percent interest. There is a very simple economics of banking behind this. Big banks already have cheap cash (CASA Deposit) deposits of crores of customers and they give secured loans to big companies at low interest rates of 8 to 10 percent. In contrast, small finance banks offer higher interest on deposits to expand their network and attract new customers. On the other hand, these banks give small loans at interest rates of 13 to 18 percent to small shopkeepers, micro-finance groups, traders in the unorganized sector and those purchasing commercial vehicles. Since the interest earned on loans is higher, their ‘Net Interest Margin’ (NIM) is better and they are easily able to pass on a part of their profits to FD and savings account customers in the form of higher interest. Moreover, the operating expenses of the branches of these banks are also much lower and digital centric compared to the traditional big banks.
Today, from Uttar Pradesh’s capital Lucknow, Varanasi, Kanpur, Prayagraj, Gorakhpur, Noida and Meerut to Tier-2 and Tier-3 cities of the country, small finance banks have made their strong identity. Apart from Varanasi-headquartered Utkarsh Small Finance Bank and Uttar Pradesh-based Shivalik Small Finance Bank, about a dozen RBI-registered small finance banks like AU Small Finance Bank, Ujjivan, Equitas, Jana and Suryoday are successfully operating in the country. Not only this, under the new guidelines of RBI, small finance banks which perform well for 5 consecutive years, whose net worth reaches above Rs 1,000 crore and whose NPA remains under control, are also being allowed to convert into ‘universal banks’ (normal large banks). According to financial experts, if an investor wants 100% security while taking full advantage of the high interest rates of Small Finance Bank, he can adopt a very simple strategy. If you have Rs 10 or Rs 15 lakh to invest, instead of keeping the entire money in a single small finance bank, divide it into parts of Rs 4 to 4.5 lakh and make FDs in different small finance banks or in the names of different family members. By doing this, you will get the full benefit of DICGC insurance cover of Rs 5 lakh on each of your FDs and you will also get additional interest worth thousands of rupees compared to normal banks.