Certificates
of Deposits (CDs):
What is Certificate of Deposit ?
A Certificate of Deposit (CD) is a money market an instrument which is issued in a dematerialized form against funds deposited in
a bank for a specific period.
Who governs Certificate of Deposit in India?
Guidelines for issue of
CDs are presently governed by various directives issued by the Reserve
Bank of India (RBI)
The Reserve Bank of India (RBI) issues
guidelines for Certificate of Deposit from time to time.
Another language Certificate of Deposit (CD) is a negotiable money market
instrument and issued in dematerialized form or as a Usance Promissory Note
against funds deposited at a bank or other eligible financial institution for a
specified time period.
CDs
are unsecured, negotiable promissory notes issued at a discount to the face
value. They are issued by commercial banks and development financial
institutions. CDs are marketable receipts of funds deposited in a bank for a
fixed period at a specified rate of interest. India
introduced Certificates of Deposit (CDs) in 1989 to increase the range of money
market instruments in the country and thereby give investors greater
flexibility in terms of utilization of their short-term funds.
The main purpose of the scheme was to
enable commercial banks to raise funds from the market through CDs. According
to the original scheme
Who can issue Certificate of Deposit?
1. Scheduled
commercial banks (excluding Regional Rural Banks and Local Area Banks)
2. Selected All-India
Financial Institutions (FIs) that have been permitted by RBI
What is the return on Certificate of Deposit?
The CDs are issued at
discount price on face value. So return is the difference between the issue price
and face value.
Minimum size and maturity of a Certificate
of Deposit
The main purpose of the scheme was to
enable commercial banks to raise funds from the market through CDs. According
to the original scheme
A certificate of deposit can only be issued for a minimum of
Rs.1 lakh by a single issuer and in multiples of Rs.1 lakh. The maturity of a
certificate of the deposit depends on the investor. For instance, for a certificate
of deposit issued by banks, the maturity period is not less than 7 days and not
above one year while for financial institutions, a certificate of deposit
should not be issued for less than 1 year and not above three years.
The maturity period for Certificate of Deposit is different for banks and FIs.
1. For Banks
- Minimum
Period is 7 days
- Maximum
period is 1 year
2. For financial
institutions
·
Minimum Period is 1 year
·
Maximum period is 3 years
Who can invest in Certificate of Deposit?
Certificate of Deposit can be issued to:
- Individuals
- Corporations
- Companies
(including banks and PDs)
- Trusts
- Funds
- Associations
- Non-Resident
Indians (NRIs), but only on a non-repatriable basis. Such CDs cannot be
endorsed to another NRI in the secondary market.
Foreign portfolio investors (FPIs) are not permitted to invest in CDs
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