Certificate of Deposits

Introduction

• Certificate of Deposits (CDs) are the unsecured, negotiable money market instruments, which is equivalent to pro missionary note. 
• The government initiated the market of CD’s in order to widen the range of money market instruments and to provide a higher flexibility to investors for investing their surplus money for the short term.

Features of Certificate of Deposits

• CDs are either issued in demat form or in the form of usance  promissory note (Physical form).
• CD’s can be issued by scheduled commercial banks (excluding Regional Rural Banks and Local Area Banks); and Financial Institutions (FIs) that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI.
• The minimum deposit that could be accepted from a single subscriber should not be less than INR 1 Lakh. Therefore, the minimum amount that can be invested in CD’s is 1 Lakh and the maximum amount could be multiple of 1 lakh.
• CD’s issued by banks should not be less than 7 days and not more than one year from the date of issue. FI’s can issue CDs for a period not less than 1 year and not exceeding 3 years from the date of issue.

Issuance of Certificate of Deposits

• Scheduled commercial banks or financial institutions in India that have been granted the permission by RBI can issue certificates of deposit
• CDs can only be issued to individuals, companies, fund houses, and such
• Co-operative banks and regional rural banks cannot issue these certificates
• It must be noted that CDs can be issued to Non-Residential Indians (NRIs) on non-repatriable basis
• However, banks and financial institutions cannot provide loans against the certificate of deposit. Moreover, banks cannot buy their own CDs prior to the latter’s maturity

As per RBI, banks are bound to maintain the statutory liquidity ratio (SLR) and cash reserve ratio (CRR) on the price of a certificate of deposit.