Certificate of Deposit (CD)

Definition: Certificate of Deposit (CD) implies an unsecured, money market negotiable instrument, issued by the commercial bank or financial institution, either in demat form or as a usance promissory note, at a discount to face value at market rates, against the amount deposited by an individual, for a stipulated time.

In finer terms, certificate of deposit is a fixed interest bearing term deposit, which has a fixed maturity. It limits the access to the funds, until the lock-in period of the investment, i.e. the depositor cannot withdraw funds, on demand.

Salient Features of Certificate of Deposit

• Eligibility: All scheduled commercial bank, not including regional rural bank and cooperative bank, are eligible to issue the certificate of deposit. It can be issued by the bank to individuals, companies, trust, funds, associations, etc. On the non-repatriable basis, it can be issued to Non-Resident Indians (NRIs) also.
• Maturity period: The CDs are issued by the bank at a discount to face value, at market-related rates, ranging from 3 months to one year. When a financial institution issues CD, the minimum term is one year and maximum three years. In addition to this, no grace period is allowed for the repayment of CD.
• Denomination: The minimum issue size of a certificate of deposit is Rs. 5,00,000 to a single investor. Moreover, when the certificate of deposit exceeds Rs. 5,00,000, it should be in multiples of Rs. 1,00,000. Add to that; there is no ceiling on the total amount of funds raised through it.
• Transferability: Certificate of deposit existing in physical form can be freely transferred by way of endorsement and delivery. CDs in dematerialised form can be transferred, as per the process of other dematerialised securities.
• Reserve requirement: Banks are required to keep CRR and SLR on the issue price of the certificate of deposit.
• Format: Banks and financial institutions can issue CD in dematerialised form only. Although the investor, at their discretion, can seek a certificate in traditional form. Moreover, it attracts stamp duty.
• Discount: Certificate of Deposit is issued at a discount to face value, determined by the market, which can be front end or rear end discount. The effective rate of discount is greater than the quoted rate in case of front end discount. On the contrary, in rear end discount, the CDs yield the quoted rate on the expiry of the specified term.

Banks issue certificate of deposit when the deposit growth is comparatively slow, and credit demand is high, and there is a tightening trend in the call rate. These are high-cost liabilities, and banks take recourse of CD’s only when there exist stiff liquidity conditions in the market.