Certificates of deposit (CDs) are short-term deposit instruments issued by banks and financial institutions to raise large amounts of money. CDs can be issued with maturities ranging from 7 days to 12 months by banks and 1 to 3 years by financial institutions. They must be purchased in amounts of at least Rs. 1 lakh. Banks and corporations use CDs to mobilize funds when needed, such as providing loans. CDs provide liquidity to banks while offering depositors higher returns than regular fixed deposits. However, the CD market in India has yet to be fully developed due to the lack of a secondary market and low usage despite being available for some time.

1. CERTIFICATE OF DEPOSIT (CD)
By Pankaj Mishra

2. Introduction
 Certificates of deposit are short term deposit instruments issued by
banks and financial institutions to raise large amount of money.
 This scheme was introduced in July 1989, to enable the banking
system to mobilise bulk deposits from the market, which they can
have at competitive rates of interest.

3. Features
Who can issue Scheduled commercial banks (except RRBs) and All
India Financial Institutions within their `Umbrella limit’.
Maturity Min: 7 days Max : 12 Months (in case of FIs minimum 1 year
and maximum 3 years).
Amount Min: Rs.1 lac, beyond which in multiple of Rs.1 lac

4. Who can subscribe CDs ?

5. Eligibility, Maturity, Issue Price
 The Certificate of Deposits may be issued at a discount on face value.
 Banks and Financial Institutions are permitted to issue these on floating rate basis.
The interest rate on floating rate Certificate of Deposits will have to be reset
periodically.
 Banks must keep Statutory reserve on the issue price of Certificate of Deposits.

6. Lock In, Loans/Buyback, Repayment
 In case of Certificate of Deposits, there is no lock in period.
 Banks and financial institutions can not grant loans against Certificate of Deposits and
they can’t even buyback their own Certificate of Deposits before maturity.
 The Certificate of Deposits are due on the date stated on the instrument.
 There is no grace period.
 If the maturity day is a holiday, the issuing bank must make payment on the preceding
day. The physical Certificate of Deposit must be presented for payment by the last
holder. Payment of Certificate of Deposit should only be by crossed cheque.

7. Transferability, Loss of Certificate, Security
The physical Certificate of Deposits are freely transferable by endorsement and delivery.
In case of loss of Certificate of Deposits, duplicate certificate may be issued only after:
 - A notice is given in at least one news paper.
 - There has been lapse for 15 days from the date of notice
 - Investor has to executes an indemnity bond

8. Advantages
 Certificate of deposits are the most convenient instruments to depositors as they
enable their short term surpluses to earn higher return.
 CDs also offer maximum liquidity as they are transferable by endorsement and
delivery. The holder can resell his certificate to another.
 From the point of view of issuing bank, it is vehicle to raise resource in times of
need and improve their lending capacity. The CDs are fixed term deposits which
cannot be withdrawn until the redemption date.
 This is an ideal instrument for the banks with short term surplus found to invest
at attractive.

9. Problems Hindering CD Market
 Absence of secondary market:-this appears due to the fact that CDs are priced
high & holder in primary market prefer to hold them to maturity.
 Although the scheme for CDs has been in operation for quite some time, it has
yet to gain ground & its usage has remained confined to only few corporations &
banks.

10.  Say Amar wishes to borrow Rs. 30 Lakhs for his new business venture.
 He goes to bank & ask for the loan.
 But though the bank agrees to provide a loan, it realizes that it has only
Rs. 20 lacs at present.
 Now the bank does not wish to lose him to another bank.
 So the bank asks him to come back later to collect the loan amount at
let’s say 15%.

11. So how does the bank provide the
additional Rs.10 lakhs?
 The bank has corporate relationships from whom they can borrow.
 In order to borrow, they issue ‘Certificates of Deposit’ to these
corporate relationships who in turn subscribe to them.
 Obviously the rate of interest offered by the bank to the corporate
institutions would be higher than the regular fixed deposits.
 Thus money comes into the bank and is offered to Amar.

12. How CDs Work!
Borrower
Approaches Bank
Bank Lends Money