Small finance banks compete for term deposits amid falling interest rates

This comes at a time when banks are flush with funds after note ban and are cutting deposit rates

With a number of small finance banks (SFBs) already operational, customers are being offered interest rates up to 150-200 basis points (bps) higher than the prevailing market rates.

This comes at a time when banks are flush with funds after demonetisation and are cutting interest rates on deposits to keep pace with the slow credit offtake. Suryoday Micro Finance, which launched a bank on Monday, is offering as high as nine per cent interest rate on term deposits, depending on maturity, (with additional 0.75 per cent for senior citizens). Rate on savings accounts has been fixed at 6.25 per cent (for up to Rs 1 lakh). 

For deposits between Rs 1 lakh and Rs 10 lakh, the bank is offering a rate of about 7.25 per cent, and seven per cent for deposits above Rs 10 lakh. “We are going slow in garnering deposits. Our focus will be more on retail deposits. Traction will be slow but steady. In one month, we are expecting Rs 4-5 crore of deposits, mostly from retail customers. At least for two to three months, we will offer a slightly higher interest rate than the market to gain retail traction,” said R Baskar Babu, chief executive, Suryoday.

Another SFB, Utkarsh, is offering term deposit rate as high as 8.5 per cent (0.50 per cent higher for senior citizens) with six per cent on savings. In the next two months, Utkarsh will open 50 new branches. It will also upgrade some of the existing microfinance institution (MFI) branches into full-fledged banks.  The full-fledged banking services would commence in April, said Govind Singh, managing director of Utkarsh. The bank expects to garner Rs 2,000 crore as deposits by March 2018.

Another SFB, Ujjivan too is looking to offer higher-than-market rates on deposits. It is slated to be launched in the first week of February. Unlike most others, Ujjivan will initially focus on wholesale deposits. “We will be offering slightly higher rates compared to the market. Initially, we will raise wholesale deposits as retail deposits will take some time,” said Samit Ghosh, chief executive officer, Ujjivan Financial Services.

Equitas is offering as high as nine per cent on fixed deposits. Rate on savings account hovers around 6-7.5 per cent.

The cost of funds for most of the SFBs was 11 per cent or more. But, after converting into banks, even with rates higher than the market, their cost of funds will come down. SFBs are initially expected to continue to focus on microlending rather than full-fledged retail banking. Hence, most of the proposed banks have kept marginal cost of funds based lending rate (MCLR) high. For example, the MCLR for Suryoday is 17 per cent.

Capital Small Finance Bank has been offering a savings rate of four per cent. For term deposits, the highest rate offered by the bank is seven per cent (for five to ten years) and 7.2 per cent for 400 days, with higher rates for senior citizens.

According to the Reserve Bank of India (RBI) norms, small finance banks have to start operations by April. In September 2015, RBI granted licences for 10 small finance banks.  Earlier this year, central bank had permited 11 companies to start payments banks.