Certificate of Deposit (CD) – Definition, Features and Advantages

Certificate of deposits (CD) are short term deposit instruments issued by banks and financial institutions to raise large sums of money. Certificate of Deposit (CD) is a negotiable money market instrument and issued in dematerialised form or as a Usance Promissory Note, for funds deposited at a bank or other eligible financial institution for a specified time period. CDs can be issued by (i) scheduled commercial banks excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs); and (ii) select all-India Financial Institutions (FIs) that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI.

Read More: Money Market In India

Features of Certificate Of Deposit

  • Document of title to time deposit.
  • Unsecured negotiable promotes.
  • Freely transferable by endorsement and delivery.
  • Issued at discount to face value.
  • Repayable on a fixed date without grace days.
  • Subject to stamp duty like the usance promissory notes.

The banks in USA in 1960s introduced CDs which are freely negotiable and marketable any time before maturity. The CDs were issued by big banks in the USA of $1 million at face value bearing fixed interest with a maturity generally ranging from 1 to 6 months. Banks sold CDs direct to investors or through dealers who subsequently traded this instrument in secondary market. The American banks issued for the first time dollar CDs in London in 1966. The bank of England gave permission to around 40 banks to make CD issue.

The feasibility of introducing Certificate of deposits(CD) in India was examined by the Tamb Working Group in 1982 which did not, however, favour the introduction of this instrument. The matter was again studied in 1987 by the Vaghul Working Group on the Money Market. The Vaghul Group recognized that CP world be attractive both the banker and investor in that the bank is not required to encase the deposit prematurely while the investor can liquefy the instrument before its maturity in the secondary market.

On the recommendations of the Vaghul Committee, the RBI formulated a scheme in June 1989 permitting scheduled commercial banks (excluding RRBs) to issue CDs. It terms of the scheme, CDs can be issued by scheduled commercial banks at discount on face value and the discount rates are market-determined. The RBI has issued detailed guidelines for the issue of CDs and , with the changes introduced subsequently, the scheme for CDs has been liberalized.

RBI Guidelines on Certificate of Deposit

Read: RBI Guidelines for Issue of Certificates of Deposit

  1. The denomination of CDs could be in multiples of Rs. 5 lakh subject to a minimum size of an issue to a single investor being Rs. 25 lakh. The CDs above Rs.25lakh will be in multiples of Rs.5 lakh. The amount rates to face value (not mortuary value) of CDs issued.
  2. The CDs are short-term deposit instruments with maturity period ranging from 3 months to one year. The banks can issues at their discretion the CDs for any member of months/ days beyond the minimum usance period of three months and within the maximum usance of one year.
  3. CDs can be issued to individuals, corporations, companies, trust funds, associations, etc. non-resident Indians (NRIs) can also subscribe to CDs but only on a non-repatriation.
  4. CDs are freely transferable by endorsement and delivery but only after 45 days of the date of issue the primary investor. As such, the maturity period of CDs available in the market can be anywhere between 1 day and 320 days.
  5. They are issued in the form of usance promissory notes payable on a fixed date without days of grace. CDs are subject to payment of stamp duty like the usance promissory notes.
  6. Banks have to maintain CRR and SLR on the issue price of CDs and report them as deposits to the RBI. Banks are neither permitted to grant loans against CDs nor to buy them back prematurely.
  7. From October 17, 1992, the limit for issue of CDs by scheduled commercial banks (excluding Regional Rural Banks) has been raised from 7 per cent to 10 per cent of the fortnightly aggregate deposits in 1989 — 90. The ceiling on outstanding of CDs at any point of time are prescribed by the Reserve Bank of India for each bank. Banks are advised by the RBI to ensure that the individual bank wise limits prescribed for issue of CDs are not exceeded at any time.

At present the total permissible limits for issue of certificates of deposits (CDs). By the baking system amounts to Rs. 15,038 crore equivalent to 10 per cent of the fortnightly average outstanding aggregate deposits in 1989 — 90. The outstanding amount of CD issued by 50 scheduled commercial banks as on February 5,1998 amounted to Rs.10,261 crore and formed 70.4 per cent of the limit set for these banks for issue of CDs. To enable banks to mobilize deposits on comparative terms id has been decided to enhance the limits for issue of CDs . Accordingly, with effect from April17m 1993 scheduled commercial banks (excluding Regional Rural Banks) can issue CDs equivalent to 10 per cent of the fortnightly average outstanding aggregate deposits inn 1991 — 92. Consequently the aggregate limits for issue of CDs by eligible banks would increase from Rs. 15,038 crore of Rs. 20,552 crore. There financial instruments, viz, industrial development banks in India, industrial credit and investment corporation of India and industrial finance corporation of India, were permitted to issue CDs with a maturity aggregate limit of Rs. 100 crore (enhanced to Rs. 1,350 crore in May 1992) . effective from July 29, 1992 the industrial reconstruction Bank of India has also been permitted by issue CDs upto a limit of Rs. 100 crore.

Advantages of Certificate of Deposit

  1. Certificate of deposits are the most convenient instruments to depositors as they enabler their short term surpluses to earn higher return.
  2. CDs also offer maximum liquidity as the are transferable by endorsement and delivery. The holder can resell his certificate to another.
  3. From the point of view of issuing bank,, it is vehicle to raise resource in times of need and improve their lending capacity. The CDs are fixed term deposits which cannot be withdrawn until the redemption date.
  4. This is an ideal instrument for the banks with short term surplus found to invest at attractive.

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