Two microfinance companies – Suryoday and Utkarsh – began operating as small finance banks this Monday.
Suryoday has opened its first branch in Navi Mumbai and is offering highest interest rate on 1-2 year deposits (9%). This is much higher than other commercial banks (6-7%). For senior citizens it is offering 9.75% (75 bps higher than normal rates, usually banks pay ~50bps higher than normal rates). On savings deposits, the bank is paying in the range of 6.25-7.25% (payable monthly as compared to quarterly for most of the other banks).
Small finance banks (SFBs), payment banks and newly-started private sector banks (IDFC Bank and Bandhan Bank) are offering higher SA and Fixed deposit rates. Rate of interest offered by Suryoday is equal to home loan rates (annualised basis) offered by large banks. There is also an arbitrage opportunity (rather than prepaying the home loans, one can open FD to earn higher interest rate), said Religare Capital Markets in a flash note today.
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“Of course, one needs to keep in mind the risk attached with newly-opened banks (though chances of default on fixed deposits in the first year of operations will be low) and tax implications (FD is taxable and but at the same time interest payable on home loans is tax deductable to certain extent). Customers who has availed overdraft facility with banks for home loans can see decent arbitrage if they can open FD in the name of their parents (senior citizen) earning 9.75%,” says Parag Jariwala, CFA, VP–Institutional Research, Banking and Financial Services, Religare Capital Markets Ltd.
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Pressure on existing banks for deposit mobilisations?
SFBs and payment banks are currently too small to offer any direct competition to small/mid size fast-growing private sector banks. In addition, few large HNI customers, cash rich corporates (for bulk deposits) may go with a bank having well established track record. However, “in the medium to long term, SFBs which successfully transition themselves into strong and well-managed bank with good corporate governance may get decent flow of deposits from HNI customers and corporates,” says Jariwala.