Should you shift FDs for better rate?

People shift jobs for an increase of few thousand rupees in salaries. Be it insurance policies, air tickets and even the Ola/Uber cab ride, we love a good deal. But when it comes to chasing banks offering higher fixed deposit (FD) interest rates, the same bargain-loving customer transforms into an extremely cautious investor who doesn’t trust new banks. As a result, big old banks offering 7% FD interest are getting away, while the 8-9% offer from newbies hunting for retail deposits goes abegging. DNA Money brings you the latest on bank FD interest rates, and talks to experts about whether you should switch or not. Read on.

Lower FD rates impact senior citizens

There are many families, especially those with retired persons, whose only financial goal today is to earn a higher interest income. But banks haven’t been kind to them. As loan rates were lowered to let people go on a credit binge, the return offered on bank deposits sank. The younger retail investor may swear by mutual funds, but the bank FD remains the favourite for a large population. For these cautious depositors, FD rates across top banks are anything but attractive.

According to Paisabazaar, the maximum annual interest rate offered at top banks including SBI, ICICI, HDFC and Axis, range between 6.75% and 7.25% today. “This means a Rs 10 lakh bank FD will fetch somewhere between Rs 69,230 and Rs 74,500 a year, due on quarterly compounding. While big banks have of late started hiking the FD rates again, interest rates for a good two years were declining. About 2 percentage points lower interest rate means about Rs 21,200 lower FD interest on Rs 10 lakh worth deposits. Budgets for many of my senior citizen friends failed,” points out Sandeep Singh, a retired private-sector employee. 

The glaring gap between FD interest rates offered by big banks and by small banks is too big to be ignored. The regular interest rate for one-year tenure at big banks is between 6.7% and 7.25%, but the rates offered by small banks for the same one-year tenure are between 8% and 8.75%. “Yes, I have heard about them (new banks). I don’t see a branch in my locality. Many years ago, banks used to fail. So, we are cautious. My family’s deposits are with PSU banks, but the reduction in deposit rates has really hurt us. We used to earn Rs 24,000 interest a quarter about two years ago, and now we get only Rs 17,000,” lamented K Sundaram, a Chennai resident who opted for voluntary retirement in 2011.

New banks are safe  

There is some hope in form of FD rates offered by new banks. Called small finance banks, or SFBs, the new lenders are looking to build a war chest of deposits. Hence, these banks are offering more money in form of interest. The best FD interest rates range between 8.5% and 9% for the general public. Senior citizens can get from 9.1% to 9.5%.

Naveen Kukreja, CEO and co-founder, Paisabazaar.com said: “As with other bank categories, the SFBs too are well regulated by RBI and have to follow the guidelines set by RBI related to lending and other parameters. They, too, come under the umbrella of scheduled commercial banks (SCBs), which entitles their depositors to a deposit insurance of Rs 1 lakh from Deposit Insurance and Credit Guarantee Corporation (DICGC) in case of bank failure. The insurance cover includes savings, current, fixed and recurring deposits.”    

There exists consumer inertia when it comes to financial products, in general. Like, consumers would rarely change their primary bank account, even if they may be provided better interest rates on their deposits by other banks. Plus, there is this perception that PSU banks and bigger private sector banks are the safest.

“A large section of consumers may resist opening high-yield fixed deposits offered by the newer banks, especially Small Finance Banks (SFBs), primarily due to this inertia and certain concerns about the stability of such banks. However, given the past track record of RBI and the government in dealing with bank failures, such fears can be best termed as unfounded. These banks usually have clean books. For example, the SFBs had a gross NPA ratio of 1.8% as on December 2017 whereas the public sector and private sector banks had gross NPA ratios of 11.7% & 4.1% respectively as on the same date,” said Kukreja.

Don’t shift entire corpus to new banks

While it may not be prudent to shift all your FD money into new banks, experts say that deposit holders should try out new banks slowly. “The new banks are offering a higher rate to mobilise deposits for their working capital requirements. While RBI governs all banks, the risk in the newer banks could be more as compared to established banks. Hence, customers must not overexpose themselves to deposits from new banks just because the returns are higher. Other than the risk, they must evaluate the bank on ease and convenience of transacting. Depositors should limit their exposure to new banks to maximum 20% and can further split these deposits between two to three new banks,” advised Mrin Agarwal, a financial educator, founder director of Finsafe India.

Higher rates offered to attract depositors

Do note that new banks may offer high FD rates today, but these may not always remain high. For instance, when Bandhan Bank was launched in August 2015 it’s term deposits fetched a maximum interest rate offered of 8.5% for one to three years. Now, the bank pays highest rate of 7.40% (for two years to less than five years tenure) after revision in rates with effect from June 4, 2018.