Bureau Budget 2021 had a major incentive for investors — a hike in the insurance cover for bank deposits to ₹5 lakh from the earlier ₹1 lakh (aggregate of all deposits with one bank).
This comes in the wake of the recent debacle at a co-operative bank that stoked fear in the minds of depositors.
In this backdrop, investors can now consider fixed deposits with small finance banks (SFBs) as they offer attractive interest rates compared with those offered by public sector banks and private lenders.
Although non-banking finance companies (NBFCs) offer rates higher than those of SFBs, the lack of deposit insurance makes them a riskier pick.
As interest rates have almost bottomed out, the rates are likely to inch up in the next two or three years. Hence, it will be wise to lock in at current rates for a tenure of just one or two years.
Currently, private banks offer 6.2-7.8 per cent for deposits for 1-2 years. SFBs continue to offer premium rates.
Jana Small Finance Bank offers the highest rate — 8.5 per cent for a deposit of 499 days (1 year, 4 months and 13 days). Senior citizens get an even higher rate of 9.1 per cent for the same tenure.
The bank offers both cumulative and non-cumulative deposits. Under the cumulative option, the effective yield for an investor will be higher, at 8.78 per cent for a 499-day deposit (9.42 per cent for senior citizens), due to quarterly compounding of interest.
Those of you who wish to have regular payouts can opt for the non-cumulative option, with either monthly, quarterly, half-yearly or annual payouts.
How to apply
Headquartered in Bengaluru, Jana has a presence in 19 States. It currently has about 250 branches across 150 cities.
You can open an FD by walking into any branch. The bank, upon request, also sends its personnel to your residence for opening an FD if you reside within a 30-km radius of any of its branches. You will have to furnish an ID proof (such as Aadhaar card and voter id) and your PAN, besides a cheque for the amount for which you wish to open the FD. The bank usually takes three-four days after collecting the documents to open the FD. Existing customers can create new deposits online.
Keep in mind that the bank requires you to open a savings account first in order to invest in FDs. These savings accounts come with a minimum balance requirement, the non-maintenance of which will attract charges.
Jana requires you to maintain a minimum monthly average balance of ₹2,500 in your savings account, failing which a charge of up to ₹20 (plus taxes) per month is levied. You can avoid this if your FD exceeds ₹25,000, as the bank then gives you a zero-balance savings account.
About the SFB
Jana Small Finance Bank, formerly Janalakshmi Financial Services, started operations on March 28, 2018. It has a diversified presence, with its top three States — Tamil Nadu, Karnataka and Maharashtra — contributing about 50 per cent to the overall portfolio (as of a year ago).
The bank currently offers loans to the agriculture, business and home development segments. It plans to enter the consumer durables and two-wheeler financing segments in the near future.
As of FY19, the bank had a loan book of ₹6,217 crore, with gross and net NPA at 8.41 and 4.39 per cent, respectively.
Apart from hiking the deposit insurance, the Budget also introduced an optional new tax regime with lower rates but without deductions/exemptions under the Income Tax Act.
While interest on FDs is taxable under the head ‘Income from Other Sources’, senior citizens get a deduction (under Section 80TTB) in the current tax regime on interest up to ₹50,000 a year.
This deduction will not be available from April 2020 if senior citizens opt for the new tax regime.