Are small finance bank deposits safe? Answers to your personal finance queries

A. While it is unlikely that the RBI or the government will allow any commercial bank to collapse in India, your neighbour is quite right to worry about his deposits, if he has all his savings parked in a single small finance bank. Small finance banks, or SFBs, are a new category of banks licensed by the RBI that provide loans to small-ticket and less- affluent borrowers, who are usually not favoured by big banks. SFBs are required to lend at least 75% of the loans to priority sectors as defined by the RBI and at least 50% of the loans need to be below ₹25 lakh.This makes their loan books riskier than those of mainstream commercial banks.

However, these banks are regulated stringently by the RBI. SFBs, like commercial banks, need to follow Statutory Liquidity Ratio and Cash Reserve Ratio rules, which means setting aside 22.25% of their deposits. They are required to maintain a capital adequacy ratio of 15% and cannot lend more than 10% of their capital to a single borrower. SFBs are covered by deposit insurance, just like other banks, for up to ₹5 lakh per account holder.

While these safeguards make these banks a reasonable parking ground in normal times, these are abnormal times. Financials of most banks in India are expected to come under stress owing to COVID-19 and the lockdown that has brought businesses to a standstill. Apart from the bad loans resulting from the cash crunch, the RBI has also required banks to grant a moratorium (facility to defer repayments) to their borrowers for six months from March 1, 2020 to August 31, 2020, which can lead to businesses and individuals skipping or delaying repayments. SFBs, which lend to low-income and self-employed folks, have seen the highest proportion (70-80%) of borrowers availing of this moratorium, as self-employed folks have seen the most job losses. The resulting bad loans may require these banks to create higher provisions, denting their profitability and capital ratios in the coming months.

In light of the above, your neighbour should certainly not be putting all his eggs in one basket by depositing all his life savings in one SFB. To avoid risk, it would be best for him to use SFBs for diversifying (by investing 10%), while parking the bulk of his savings in systemically important banks or post office schemes. Large, systemically important banks today offer very low deposit rates, it is true, but given the risky times we live in, it would be best to prioritise safety over returns. You can stick to 6-month to 1-year deposits so that you can switch to better rates later. Post office schemes such as Senior Citizens Savings Scheme and the Monthly Income Account offer better rates than top banks; he can maximise his deposits in those.

A. There are several options. If safety is your priority, you can consider investing in the Post Office Monthly Income Account. This government-backed scheme has a five-year lock in period with a maximum investment limit of ₹4.5 lakh and pays monthly interest at 6.6% per annum. Many banks and NBFCs offer fixed deposit schemes with monthly interest payouts. Opening FDs every month, though, may be troublesome as it will entail keeping track of multiple deposits. You could invest regularly in a 6-month recurring deposit and switch the accumulated lumpsum to an FD at regular intervals. NBFC deposits are riskier than banks’ or post office schemes and you will need to check the financials/ratings of the NBFC before investing. Your final, and most risky option is debt mutual funds, which invest your money in bonds from companies. You can invest in debt funds through monthly SIPs and use systematic withdrawal plans to receive regular cash flows. Returns tend to be volatile and your capital value can fluctuate based on market movements.