Certificate of Deposit - Definition | Meaning | features

What is a certificate of deposit? 

Certificate of Deposit or CD is a money market instrument which is issued in dematerialized form. CDs are governed by the Reserve Bank of India or RBI.  

Certificate of Deposits are issued by Scheduled commercial banks and All-India Financial Institutions (FIs) like IFCI as a promissory note against funds deposited in the bank. Certificate of Deposits are issued at a discount on face value, FV.

Certificate of Deposits are issued at a minimum price of Rs 1 Lakh and then in multiples of a Lakh. Banks issue CDs based on funding requirements. CDs issued by banks have a maturity period of 7 days to a year. CDs issued by FIs have a maturity period of 1-3 years.

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Certificate Of Deposit

Salient features of certificate of deposit:

Eligibility of CDs: Scheduled commercial banks issue CDs. RRBs and Co-operative banks cannot issue CDs. Certificates of Deposits are issued by banks to individuals (ordinary citizens like you and me), Mutual Funds, Trusts, Insurers and Pension Funds.

Certificate of deposit maturity period: CDs are issued by scheduled commercial banks at a discount to face value. The term period ranges from 3 months to a year. For financial institutions the term period ranges from a year to 3 years.

Certificate of deposit transferability: Certificates of deposits which are in physical form can easily be transferred vis-à-vis endorsement and delivery. Certificates of deposits in dematerialized form can be transferred just like dematerialized securities.

Loan against CD: Certificates of deposit don’t have a lock-in and banks don’t grant loans against CDs. Banks cannot buy back CDs before maturity. Banks will have to consider CRR and SLR on CD issue price.

Format of certificate of deposit:

Banks and FIs must issue certificates of deposits in the dematerialized form. However, you and ordinary investors can ask for certificates of deposits in physical form. Certificates of deposits have stamp duty. Make sure the CD is issued on good quality paper and is signed by at least two or more signatories.

What’s the minimum size and maturity of a CD?

The minimum size of a certificate of deposit is Rs 1 Lakh. For banks, maturity is 3 months to a year. For FIs it’s 1-3 years. 

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Return on Certificate of Deposit:

CDs are issued at a discount on face value, FV. Return on certificate of deposit is the difference between issue price and the face value.

What’s the difference between commercial paper and certificate of deposit?

Certificates of deposits are issued by banks and financial institutions. Commercial papers are issued by large corporates, primary dealers PDs and All–India Financial Institutions.

CDs are issued at a minimum size of Rs 1 Lakh and in multiples of Rs 1 Lakh, thereafter. Commercial Paper called CPs is issued in sizes of Rs 5 Lakhs and in multiples, thereafter.

When do banks issue CDs?

Banks issue CDs only when deposit growth is low and credit demand is high. CDs are high cost liabilities for banks and CDs are issued only when stiff liquidity conditions exist in the markets.

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What if you lose certificates of deposits?

Place a notice in at least one local newspaper. Wait for a lapse of a reasonable time period (say 15 days). The duplicate certificate can be issued only in physical form. You do not require any fresh stamping as the duplicate certificate is issued in place of the lost original CD.

The duplicate CD must clearly indicate that it’s a duplicate. The duplicate certificate must state the original value, due date and the date of issue.

Difference between certificate of deposit and FD:

Fixed deposits also called time deposits and certificates of deposits are one and the same thing. Many banks also call FDs as CDs. Certificates of deposits and FDs offer higher interest than savings bank accounts.

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Can NRIs invest in CDs?

Yes, NRIs can invest in CDs. The maturity amount cannot be repatriated by the NRI to the country of residence like US, UK or Australia.

Who invests in CDs?

• Ordinary individuals.
• Corporations
• Banks
• Financial Institutions
• Mutual Funds
• Associations
• NRIs (they cannot repatriate on maturity)

Foreign Portfolio Investors are not allowed to invest in CDs.

Important points on certificates of deposits:

• Banks issue CDs and investors deposit money for a specific time period and rate.
• RBI is the regulator of money markets.
• CDs are fully taxable.
• CDs are not publically traded.
• They are an excellent short-mid term investment.

Are you cheated by banks? Lodge a complaint on Iamcheated.com which is a free online consumer complaints portal, which registers consumer complaints online and helps resolve them. If you have been cheated by fraudsters, you can post your complaint on Indianmoney.com complaints portal IamCheated.com.

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