Certificates of Deposit

Certificates of deposit are unsecured, negotiable short term instruments in bearer form, issued by commercial banks and development financial institutions.

Certificates of deposit were introduced in June 1989. Only scheduled commercial banks were allowed to issue them initially. Financial institutions were permitted to issue certificates of deposits in 1992.

Features of CDs

Certificates of deposits (CD) are time deposits of specific maturity similar to fixed deposits (FDs). The biggest difference between the two is that CDs, being in bearer form, are transferable and tradable while fixed deposits are not. Like other time deposits, certificates of deposit are subject to SLR and CRR requirements. There is no ceiling on the amount to be raised by banks. The deposits attract stamp duty as applicable to negotiable instruments. They can be issued to individuals, corporations, companies, trusts, funds associates, and others. NRIs can subscribe to the deposits on non-repatriable basis.

CDs are issued by banks during periods of tight liquidity, at relatively high interest rates. They represent a high cost liability. Banks resort to this source when the deposit growth is sluggish but credit demand is high. Compared to other retail deposits, the transaction costs of CDs is lower. A large amount of money is mobilized through these deposits for short periods, reducing the interest burden when the demand for credit is slack.

Measures to Develop the CD Market:

In 1989-90, the maximum amount that could be raised through CDs was limited to one per cent of the fortnightly average outstanding aggregate deposits. Since these deposits were subject to reserve requirements, a bank-wise limit on their issue of CDs was prescribed. With time, the bank-wise limits were raised. From October 16, 1993, these limits were abolished. In April 1993, scheduled commercial banks were permitted to raise CDs without any ceiling on the interest rate. This not only enabled banks to raise resources at competitive rates of interest but also enabled CDs to emerge as a market-determined instrument. The deposits serve as relationship instruments, issued by banks on a discretionary basis to high new worth clients.

In 1992, six financial institutions – IDBI, IFCI, ICICI, SIDBI, IRBI and EXIM Bank were permitted to issue CDs. These institutions could issue CDs with a maturity of more than one year and up to three years for an aggregate amount of Rs 2,500 crore.

Effective from May 3, 1997, an umbrella limit for the mobilization of resources by way of term money borrowings, CDs term deposits, and inter-corporate deposits was prescribed for three financial institutions IDBI, ICICI, and IFCL supplanting the instrument wise limits stipulated earlier. The overall ceiling for the umbrella limit was set equal to the net owned funds of the financial institutions. A similar umbrella limit was also prescribed for EXIM bank and SIDBI in June and August 1997, respectively.

The certificates of deposit are issued by commercial banks on a discount it face basis; those CD’s of development financial institutions can be coupon bearing. The discount rate of a CD is market determined Coupon rates on the deposits issued by banks and financial institutions are published by the Reserve Bank on a fortnightly as well as monthly basis.

In 2000-01 the minimum maturity of a CD was reduced to 15 days to bring them at par with other short-term instruments like commercial papers and terms deposits.

With a view to broadening the CD market, the minimum size of issue was gradually scaled down from Rs 5 lakh to Rs 1 lakh in June 2002. From June 30, 2002 banks and financial institutions were required to issue CDs only in the dematerialized form.