The Reserve Bank of India (RBI) has expressed concern about the concentration risk, asset quality, and resultant stress in the small finance banks.
A disproportionate amount of lending to a particular sector or a particular set of borrowers leads to concentration risk and the likelihood of default increases in such cases. “The increased levels of non-performing assets directly impact the earnings and profitability of the banks. This, in turn, initially leads to pressure on the capital invested by the promoters of the bank,” says Jyoti Prakash Gadia, Managing Director, Resurgent India, an investment bank.
In extreme situations of very high levels of losses to a bank, the depositors can also get adversely impacted as the ability of the bank to repay the depositors is directly linked to the health of the credit portfolio of the bank.
“In case of heavy defaults of loans, correspondingly the repayment capacity of banks to repay the depositors gets impacted on account of insufficient funds and liquidity constraints. This can lead to a situation of run on the bank directly impacting the depositors in extreme situations,” says Gadia.
That said, most SFBs are also insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) for bank deposits up to Rs 5 lakh per depositor. So, even if there is a problem, this will cover most depositors.
Should You Put Money In FDs Of Small Finance Banks
Small finance banks' FDs are attractive as they offer a higher rate of interest than regular banks like the State Bank of India, HDFC Bank, and so on. As of today the interest rate on deposits of three years to less than five years in SBI is 6.75 per cent. For some small finance banks, it can be as high as 7.25 per cent. But should you deposit your money in FDs of small finance banks to get a higher interest rate?
“So long as you don’t have more than Rs 5 lakh as principal and interest together, your deposits will be safe no matter what. It is best to diversify your FD investments across banks so that none of your holdings, including principal and interest, are more than the Rs 5 lakh guaranteed by DICGC,” says Adhil Shetty, CEO, BankBazaar.com. The amount of deposit beyond Rs 5 lakh per bank is unprotected and uncovered.
