New Delhi, June 3 -- The Reserve Bank of India (RBI) cut the repo rate by 125 basis points through 2025, and most large banks have steadily passed on those cuts to both borrowers and depositors. Yet, advertisements promising fixed deposit (FD) rates of up to 8% at small finance banks (SFBs) continue to catch the eye.

The reason is simple: unlike larger lenders with diversified and sticky deposit franchises, small finance banks rely more heavily on retail deposits to fund their loan books and, therefore, need to offer higher rates to attract and retain savers.

The rate gap is significant compared to a public sector bank. Data from Paisabazaar as of May 29 shows that for five-year fixed deposits, small finance banks offer interest in the ...