These banks need to build a significant deposit base to start full-fledged banking.
With a number of small finance banks expected to start operations in the next six months, small savers are likely to gain from competitive rates expected to be offered by these banks.
Almost all the proposed small finance banks are planning to offer interest rates higher than that offered by post offices and public sector banks.
These banks need to build a significant deposit base to start full-fledged banking.
Capital Small Finance Bank, India's first small finance bank, which started operations on April 24, 2016, is offering an interest rate of 7.85 per cent on 400-day deposits.
Most public-sector banks have been offering 7-7.50 per cent on deposits of similar tenure. In a little more than three months, the bank has been able to garner Rs 100 crore of fresh deposits.
“Initially, interest rates can play an important role in a small finance bank. The rates on the deposits have to be rightly priced. There could be some price war among small finance banks,” said Sanjay Agarwal, managing director and founder of Au Financiers.
The proposed bank will focus on urban customers for deposit mobilisation, while banking on rural customers for microlending.
Bandhan Bank, which started operations about a year ago, has been offering up to 8.5 per cent interest rate, with an additional 0.5 per cent for senior citizens, on retail deposits.
This is 100-150 basis points (bps) higher than that offered by most other public-sector banks.
In eight months, between August 2015 and March 2016, Bandhan Bank could garner Rs 12,090 crore in deposits, with 25-30 per cent growth every month.
At present, most microfinance institutions borrow money from banks at 12-14 per cent.
Hence, even if they offer an interest rate which is 50-100 bps higher than that offered by most public-sector banks, their cost of funds would come down significantly.
According to R Baskar Babu, chief executive officer at Suryoday Micro Finance, while most small finance banks are likely to offer higher interest rates on deposits than that in banks or post offices, these won’t be more than 8.5 per cent, as the cost of establishment would have to be factored in while calculating the cost of deposits.
Another proposed small finance bank, Ujjivan Financial, is initially eyeing corporate deposits to boost its deposit base.
“To meet short-term liquidity, we will have to focus on corporate deposits. The interest rates on fixed deposits might have to be slightly higher than that offered by public-sector banks,” said Samit Ghosh, managing director and CEO of Ujjivan.
Disha Microfin, too, might be offering 25-50 bps higher on deposits initially.
“To attract these in urban and semi-urban areas, we'll have to offer a slight premium. Initially, the interest rates on deposits could be higher by 25-50 bps over the existing market rate,” said Rajeev Yadav, CEO, Disha Microfin.
According to Reserve Bank of India (RBI) norms, small finance banks are to start operations by April 2017.
In September 2015, RBI had granted licences for 10 small finance banks. Earlier, the RBI had granted licences for 11 payments banks.
BANKING STRATEGIES
Capital Small Finance Bank, already operational, is offering maximum interest rate of 7.85% on 400 days' deposits.
Small finance banks expected to offer interest rates 25-100 basis points higher than public sector banks
Most public sector banks are now offering interest rates between 7- 7.50%
Bandhan Bank is offering maximum interest rate of 8.50%
Bandhan Bank could garner Rs 12,090 crore deposits between August 2015 and March 2016.
