How are micro-finance banks able to offer interest rates so much higher than traditional banks?

Question

Recently while browsing on google I came to know that there are few small-finance banks which offer great returns with the high amount of interest rate up to 7% and fixed deposits up to 9-9.5%. like Fincare bank offers interest rate up to 9% on FD of 2-3 years. Can anyone tell how and why is it possible, since major players in banking are not offering such a huge interest rate?

Answer 1

Microfinance institutions work with unbanked segment. Give small loans in rural areas at high interest rates of 25%. This is still cheaper to individuals else they go to local money lender who charges 100% interest.

They can then afford to give a higher interest rates to depositors.

This is a risky segment to bank with and one should be cautious about how much to invest.

Some Cooperative Banks also similar rates.

Answer 2

It is difficult to comment specifically on this bank, but retail outlets as well as banks sometimes attract customers with a "loss leader". That is they might lose money on a specific product to attract customers who will then buy products that are more profitable.

With banking, customer acquisition, has a cost. A bank can choose to pay for advertising how they are the best and try to convince customers to open accounts on that merit; or, they can do a little less advertising and spend money giving away items to new customers. Which has more impact? A traditional euphemism for this situation, that originated in the 1950's here in the US, is that one gets a free toaster for opening up a checking account. Since that time banks have gotten creative and some give strait cash back for opening accounts.

The goal of this bank might be to be bought out by a bigger bank to enrich the founders. In order to be an attractive take over target, they might want a lot of money on deposit. How better to attract that money, but by offering high interest rates? Sure they might lose money in the short run, but they will probably make it back (and much more) in the long run.