What is most investors’ innate desire? To get highest returns at minimum risk. This desire has shaped investors’ behaviour over the years. And that could be the reason why bank deposits are still the most popular investment route. While we have built the case against bank deposits owing to their illiquid proposition and tax disadvantage over fixed income mutual fund schemes, the new generation banks are killing it with their high interest rate offerings.
It isn’t something unusual, new banks would strive hard to gain the customer base by offering high interest rate or some other perks. Jana Small Finance Bank is offering interest on FDs close to 9.6% per annum. Jana commenced operations in July’18 when they converted themselves from a micro finance institution (MFI), Janalakshmi Financial Services, to a small finance bank. As an MFI, Jana faced huge losses during the demonetisation phase which prompted them to use the licence granted by Reserve Bank of India for starting a small finance bank.
They are now regulated by Reserve Bank of India like all other banks and will use the money deposited by investors for lending. Below are the interest rates offered by them for deposit amount below 2 crore.
Senior Citizen FD
|Effective Date-14/12/2018||Effective Date-30/01/2019|
|7 days to 45 days||6.00%||6.00%||6.60%||6.60%|
|46 days to 60 days||6.50%||6.50%||7.10%||7.10%|
|61 days to 180 days||7.00%||7.06%||7.60%||7.67%|
|181 days to 365 days||8.50%||8.77%||9.10%||9.42%|
|More than 1 year up to 2 years||8.50%||9.16%||9.10%||9.86%|
|More than 2 years up to 3 years||8.50%||9.57%||9.10%||10.33%|
|More than 3 years up to 5 years||8.50%||10.46%||9.10%||11.36%|
|More than 5 years up to 10 years||7.00%||10.03%||7.60%||11.24%|
As the interest is compounded on quarterly basis, final yield received on investment is higher. For 3-5-year period yield of 10.46% is extremely good. State Bank of India currently offers interest rate of 6.80% for three to five year deposits of less than Rs 2 crore and 50 basis point more to senior citizen. One basis point is one hundredth of a percentage point. Yields offered by Jana Small Finance bank are comparable with yields offered by credit risk funds or medium to long duration fund in mutual fund industry.
So, should you invest?
On risk reward basis Jana seems to be a good option from retail investors’ perspective. However, we all are aware about how a bank can dig its own grave. In most cases, RBI comes to the rescue when banks are in trouble. But, as for your deposits safety, investor’s deposits up to Rs 1 lakh are protected through Deposit Insurance & Credit Guarantee Corporation (DICGC) – a wholly owned subsidiary of Reserve Bank of India. DICGC provides insurance for deposits up to Rs 1 lakh.
It would be wise to keep in mind that such small finance banks were micro finance institutions and may have a patchy track record in loans collection and NPAs could be higher. While there is no immediate risk to investors’ deposit but staying cautious doesn’t cost, does it? So, diversify your investments. Make use of such deposit schemes which offer assured returns but remember, “don’t put all your eggs in one basket”.