What are the Certificates of Deposit Issued by Banks?

A certificate of deposit is a money market instrument that was introduced in the year 1989 as a guarantee against deposit funds. The certificate is issued for a predetermined period. CDs are excellent short-term investments that offer assured returns.

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What are the Certificates of Deposit Issued by Banks?

What is Certificate of Deposit?

1. A CD is a money market instrument issued in the dissolved or dematerialized form. The Reserve Bank of India governs the Certificates of Deposit and keeps altering the underlying guidelines as per the market situation.
2. It serves as an agreement between the bank and the depositor that declares the horizon of agreement and the rate of return on the investment.
3. The Certificates of Deposit are issued by the FDIC (Federal Deposit Insurance Corporation) and governed by RBI.
4. The certificate is issued in a dematerialized or non-tangible form. The Certificate of Deposit can get renewed on maturity if the depositor fails to withdraw the funds within a grace period of 7 days from the date of maturity.
5. On maturity, the principal investment along with the profits can be withdrawn from the bank.

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Eligibility for Certificate of Deposit:

1. Certificate of Deposit cannot be issued by all banks, only those permitted by the RBI have the authority to issue CDs. There are only select FIs that are permitted as of now.
2. Regional Rural Banks or RRBs and cooperative banks are not permitted to issue a certificate of deposit.
3. A Certificate of Deposit can be availed by individuals, corporations, companies, as well as NRIs. In the case of NRIs, the certificate is issued only on a non-repatriable basis.
4. Although a Certificate of Deposit is a guarantee from the bank or financial institution, the loan cannot be issued against a Certificate of Deposit.
5. As the Certificate of Deposit is governed by RBI, the banks must maintain the SLR (statutory liquidity ratio) and CRR (Cash reserve ratio) on the price of Certificate of Deposit and can be regulated by RBI on need basis.
6. Banks are not allowed a buyback of their own issued Certificates of Deposit before maturity.

Issuance of Certificate of Deposit

The Certificate of Deposit can only be issued in the non-tangible or electronic form. However, there is a provision for the physical copy as well according to the Depositories Act, 1996. The banks or financial institutions themselves cannot issue the Certificate of Deposit in physical form.

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The Financial Markets Department, Reserve Bank of India, Mumbai must be informed on the same. The Certificate of Deposit must be signed by two or more authorized signatories on issuance.

Minimum Deposit Requirements

The Certificate of Deposit can only be issued for a minimum deposit of Rs 1 Lakh. There is no ceiling on the maximum amount. The deposit, however, can only be made in multiples of Rs 1 Lakh. The maturity period varies depending on the investor type. For Certificate of Deposit issued by the bank, the maturity period is a minimum of 7 days and a maximum of a year. For Certificate of Deposit issued by financial institutions, the maturity period is a minimum of 1 year and a maximum of 3 years.

Transfer of Certificate of Deposit

Certificates of Deposit are transferable when present in the physical form. They can be transferred if held in the Demat form as per the Demat securities guidelines.

Waivers and Discounts

The Certificate of Deposit can be issued at a discounted price on face value. Issuing a Certificate of Deposit on a floating rate basis as per the market rate is also a common trend.

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Benefits of taking Certificate of Deposit

Certificate of Deposit comes with several benefits like:

1. The risk involved is quite low in case of CDs as these are government securities. The principal investment made by the depositor is safe and the interest earned over the investment is also secure. As compared to stocks and bonds, CDs are highly safe investments.
2.  The interest rate offered on CDs is higher than other fixed return securities and traditional savings accounts.
3. Investors can reinvest their deposits on maturity; a grace period of 7 days is allowed to make the decision.

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Selecting Certificate of Deposit

Certificates of Deposit are available in various formats and with different returns. Following are some of the points that must be kept in mind before buying a CD:

1. The first thing to consider before buying a CD is its alignment with your financial goals. As there are different types of CDs offered by banks and FIs, you can make a selection depending on your investment horizon.
2. Banks and FIs offer different interest rates for a CD for varied investment horizons.
3. If the lock-in period seems to be on the higher side, you can choose to invest for a shorter period.

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