Yes, you heard it right, a select few small finance banks (SFBs) are giving their customers returns on fixed deposits (FDs) of over 9%!
But should you invest in them?
These banks are known to be riskier than scheduled commercial banks.
While all Small Finance Banks are governed by the Reserve Bank of India (RBI), the central bank does not offer any guarantee to the depositors. Therefore, it is better to do a thorough assessment of these banks before you deposit your money in one of them.
Before investing, it's crucial to do thorough research on the bank's financial stability and reputation, based on the following parameters -
How strong is the bank when it comes to its risk capital? (Liquidity coverage ratio, Capital adequacy Ratio)
How strong is the bank when it comes to lending? (Retail lending vs. corporate lending ratio, Gross & Net NPA Ratio, Provision Coverage Ratio)
Timely sharing of financial data
If the above seems overwhelming to you, you'd rather invest in alternate financial products like Debt Mutual Funds, Bank FDs of Scheduled commercial banks (like SBI, HDFC Bank, Axis, ICICI bank, etc.) than risk your capital in the greed of higher FIXED return. And remember our rule of thumb -
If somebody is offering you significantly higher FIXED return, there is a hidden risk attached to repayment of principal and default/ liquidity risk.
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