Small Bank, PSB Or Private Bank? Factors To Consider While Choosing Where To Deposit Your Money

Here are some of the key factors you should consider before opening an account or parking money in a fixed deposit, as per industry experts

Small banks excel in providing personalised services, tailored solutions, and occasionally higher interest rates, according to professionals.

Source : Getty

When it comes to choosing where to deposit your hard-earned money, one crucial decision to make is whether to opt for a small bank or a larger public sector or private bank. Small finance banks often attract people with alluring interest rates on deposits, while public sector banks possess a long-established presence and a solid reputation. What are the key factors one should consider before opening an account or parking money in a fixed deposit (FD)? 

Research the bank's reputation, stability, and regulatory compliance, says Ashish Misra, chief operating officer- Retail Banking, Fincare Small Finance Bank.

"Look for strong financial health, positive ratings, and a history of responsible practices. Ensure that deposit insurance is available to safeguard your funds in case of bank failure. Evaluate the bank's security measures to protect your transactions and personal information," he tells ABP Live. 

You should be mindful of fees, and compare interest rates for savings accounts and loans, according to Shruti Jain, CSO of Arihant Capital Markets Ltd. Prioritise a positive customer experience and ensure the bank values security and privacy, she adds. "The first is the type of bank itself. Small banks, PSU banks (Public Sector undertakings), and private banks — each have their own sets of advantages and disadvantages."  

Pros And Cons Of Small Banks, PSBs, And Private Banks

According to industry professionals, small banks excel in providing personalised services, tailored solutions, and occasionally higher interest rates. However, they may face challenges in terms of accessibility, adopting advanced technology, and maintaining financial stability.

On the other hand, public sector banks benefit from government backing, instilling confidence among customers and wide branch and ATM networks. But they have their own challenges like bureaucratic processes, limited autonomy, and restrictive policies/lending criteria. 

Private banks offer superior services with a wide reach and focus on customer segments. However, they may have higher fees, limited accessibility, and centralised decision-making processes which impacts accountability and customer involvement.

Interest Rates Offered By Different Banks

Comparing interest rates is a significant factor when choosing where to deposit your money. Interest rates offered by banks can vary and are subject to change. However, small finance banks offer higher deposit interest rates for several reasons. 

Explaining the reasons behind this, Ashish Misra of Fincare Small Finance Bank says: "They need to attract deposits to build up their funding base, as they are relatively new players in the banking industry. Secondly, higher interest rates help them compete with established banks and stand out in the market. Thirdly, small finance banks focus on retail customers and MSMEs, so offering attractive rates incentivises individuals and small businesses to deposit their funds."

As of June 2023, bank savings account interest rates range anywhere from 2.55 per cent to 7 per cent, while bank fixed deposit interest rates range from 3.5 per cent to 7.5 per cent, according to Shruti Jain of Arihant. 

According to data compiled by BankBazar.com, as of June 2023, State Bank of India (SBI) provided an interest rate of 6.50 per cent for general citizens and 7.00 per cent for senior citizens on their tax-saving FD. IndusInd Bank offered a higher rate of 7.25 per cent for general citizens and 7.75 per cent for senior citizens. RBL Bank's tax-saving FD provided interest rates of 7.10 per cent and 7.60 per cent for general citizens and senior citizens, respectively. HDFC Bank offered a rate of 7.00 per cent for general citizens and 7.75 per cent for senior citizens on their tax-saving FD. 

Safety Of Your Deposits 

Different banks offer varying levels of security for depositors. PSU banks provide higher confidence due to government support and oversight, while in private banks safety of funds can fluctuate, depending on their financial health. Small banks may have slightly higher risk due to their smaller scale.

"Deposit insurance schemes are established by governments to protect depositors in the event of bank failures. They guarantee reimbursement up to a specified amount to maintain public confidence and prevent bank runs. In India, the Deposit Insurance and Credit Guarantee Corporation (DICGC) provides coverage for commercial banks, foreign bank branches, local area banks, regional rural banks, and urban cooperative banks under certain conditions," says Shruti Jain of Arihant Capital.

"Notably, there is no difference in the amount recoverable for depositors in PSU or private banks. The deposit insurance coverage is the same for all banks, irrespective of ownership or type. Primary cooperative societies, however, are not covered by DICGC," she adds.

According to Ashish Misra of Fincare Small Finance Bank, the safety of funds in different banks depends on factors such as regulatory oversight, deposit insurance, financial stability, reputation, and security measures. Thorough research and due diligence is necessary to make informed decisions about your funds.

 

Checking credit ratings can also provide valuable insights into the safety of fixed deposits (FDs) in different banks. Agencies like CRISIL assign ratings to both small finance banks and bank fixed deposits to indicate their level of safety. Higher ratings, such as FAAA or FAA, suggest greater safety for longer-term deposits, while CRISIL A1+ is preferable for shorter-term deposits. By reviewing these ratings, you can gain a better understanding of the relative stability of different banks.