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Last Updated : Nov 29, 2018 02:27 PM IST | Source:

Fixed deposits: Should you pick a large or small bank?

Look beyond the rate of return while picking an FD.

Moneycontrol Contributor @moneycontrolcom

Adhil Shetty

A fixed deposit is an investment that appeals to a wide demographic. It’s ideal for a beginner, those with a low risk appetite as well as someone who is looking to balance a high-risk portfolio. Besides, the fact that your money is safe in turbulent times is a great reason you may be drawn to this investment vehicle.

However, when it comes to making a choice of bank to choose for your fixed deposit, it’s easy to be attracted to recently launched small finance banks as they offer a higher rate of interest. They yield 8.5% interest for a 1–2 year FD and 8% for a 12–15 month FD respectively, while HDFC offers 7.3% interest for a 1-year FD and SBI yields 6.8% for the same duration.

But is it the best idea to pick a financial institution that’s a small, recent entrant? Find out here.


Why are newer, smaller banks offering a high rate of return on fixed deposits? 

To get started, it’s important to understand how these banks are able to offer such a high rate of return on fixed deposits, when the largest bank in the country, SBI, is unable to. Firstly, these banks are fresh off the boat and hence don’t have a sizeable customer base that other established players do. So, offering a high rate of interest is one way in which they can attract customers to bank with them and gain their trust. In addition, most new-age small banks are aware of the fact that customers today are more open to the idea of switching from one bank to another if they find better value for their investment. By offering a markedly high interest rate they are able to capitalise on this sentiment.

Should you take the bait?

All said and done, you may wonder if it is a good idea to choose small banks that offer a high rate of return or stick to larger, established financial institutions that offer a lower rate of return. Get started by reviewing how secure the bank is. Check their records, if they’ve been in the news recently and reviews from other customers on online portals. If you find their record to be squeaky clean you can go ahead and invest.

However, to err on the side of caution is always a good approach to adopt when your money is involved. So, it is best that if you have decided to invest Rs.1 lakh in a fixed deposit, for example, you park only 25% in a new bank’s high-interest FD. This way you will be able to limit your risk exposure.

Credit Ratings

In addition, another approach you can take is familiarising yourself with the CRISIL rating. Apart from company FDs, this agency awards ratings to bank fixed deposits to indicate how safe they are. FAAA or FAA is the best rating for a fixed deposit whose tenor is greater than a year, whereas for deposits that have a tenor of less than 12 months, the rating you should look for is CRISIL A1+.


If you proceed, you should also familiarise yourself with the protection that the Deposit Insurance and Credit Guarantee Corporation (DICGC) offers. It is a subsidiary of the RBI and insures all deposits—savings accounts, recurring deposits and fixed deposits—up to Rs.1 lakh. You can visit the website to understand the banks that fall under their purview, how deposit insurance works and much more.

If you’re satisfied with the security, the only factor left to consider is the ease of access that you seek. For instance, if you prefer popping into a branch for information or to carry out banking, you may find that new banks have branches that are far and few. For this reason alone choosing a newer entity may not be the right choice for you. However, if you’re comfortable with banking online there’s no reason for you to hesitate.

It’s easy to see that once you do your due diligence there’s no reason to worry. However, if you want to be prudent it’s best that you start small when choosing a new bank.

The writer is CEO,
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First Published on Nov 29, 2018 10:42 am
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