Fixed deposits are everyone’s favourite. And if these are offered by banks, there are more takers, especially among the risk-averse. The relative safety of a defined interest and certainty of receiving the maturity amount are great draws for investors of all hues.

In recent times, small finance banks (SFBs) have become popular for providing better interest rates on the deposits than other scheduled commercial banks. These SFBs are entities that provide banking services to the unserved/underserved sections of society. Given that they do not have too many lucrative savings accounts the way regular large banks do, SFBs try to mobilise deposits by offering higher interest rates. Small finance banks are regulated by the RBI and have DICGC (Deposit Insurance and Credit Guarantee) cover, which makes deposits up to ₹5 lakh secure.

Three attractive options

In the small finance banking space, we have chosen banks that offer the best rates on the 2-to-3-year tenure. We have also examined a few key metrics to filter the most suitable banks for you. Suryoday Small Finance Bank, Ujjivan Small Finance Bank and Equitas Small Finance Bank are our picks.

These banks have been chosen based on the interest rate offered, CAR (Capital adequacy ratio) and NIM (Net Interest margin). Capital adequacy ratio is the amount of capital as a percentage of a bank’s risk-weighted assets that shows the bank’s reserves to cover a certain amount of losses before being at risk of insolvency. Net Interest margin is the measure of the net interest income (interest earned – interest paid) as a percentage of average interest generating assets.

Suryoday SFB offers FD with both traditional and re-investment options. The minimum tenure is 7 days. In case the FD is liquidated within 7 days of booking no interest will be paid. The minimum amount of deposit is ₹1,000 and in multiples of ₹ 1 thereafter. The bank offers an interest of 8.51 per cent per annum for a tenure of 2-3 years (999 days) for amount less than ₹2 crore, senior citizens get an additional 0.25 per cent. The cost of funds has reduced 40 basis points to 6.7 per cent in September 2022 quarter YoY.

Ujjivan SFB offers a rate of 7.95 per cent for tenure of 990 days and 7.7 per cent up to 989 days, senior citizens will get an additional 0.75 per cent. The bank also offers an FD product called Platina with similar features, but interest rates will be 20 basis points higher than regular rate and minimum amount of deposit is ₹15 lakh with upper limit of ₹2 crore. The bank provides the option to start FD both on online and offline channels. The cost of funds came down to 6.1 per cent in Q2 FY23 from 7.4 per cent in Q2 FY22.

Equitas Small Finance Bank offers rate of 7.5 per cent for 888-day period and 7.4 per cent for tenure of 2-3 years, senior citizens can avail an additional 0.5 per cent. The bank provides monthly, quarterly interest payout or at maturity, it also has option for reinvestment. Equitas Small Finance offers a product called Selfe FD, which can be started online. But the drawbacks are that the maximum amount invested can be only ₹90,000, and for a tenure of one year only. The bank will renew the FD automatically at the prevailing rate unless prior instructions are given. The cost of funds for the bank was 6.25 per cent in Q2 FY23, which grew 56 basis points YoY.

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