Home » Learn » Banking » Certificate of Deposit

Certificate of Deposit

Certificate of Deposit is an agreement between the investor and the bank where the predetermined amount of money is deposited for a specific period, and in return, the bank pays interest on such deposit. Certificate of Deposit will be issued in dematerialised form by the banks and financial institution that have been permitted by Reserve Bank of India (RBI). In this article, we look at the Certificate of Deposit in detail.

Eligibility Criteria

Any scheduled commercial banks and RBI approved financial institution can issue the Certificate of Deposit (CD) to the individuals, companies, corporations, trusts, funds, associations, etc. 

Note: Also, Certificate of Deposit can be issued to Non-Resident Indians (NRIs) but on a non-repatriable basis.

Features of the Certificate of Deposit

The features of the Certificate of Deposit are listed below:

• Maturity Period: The CD issued by the commercial banks will have a maturity period of seven days to a year. CD issued by the financial institution will have a maturity period of one to three years.
• Denomination: The minimum amount of Certificate of Deposit (CD) should be Rs.1 lakh would be accepted from a single investor. 
• Discount: CD would be issued at a discount on face value, the banks and financial institution are allowed to issue these discount on a floating rate basis.
• Transferability: The certificate of deposit obtained in the physical form can be easily transferred by way of endorsement and delivery. On the other hand, certificate of deposit in the dematerialised form can be transferred, as per the guidelines followed by Demat securities.
• Reserve Requirement: Banks are required to maintain appropriate reserve requirements, i.e., Statutory Liquidity Ratio (SLR), Cash Reserve Ratio (CRR) on the issue price of the certificate of deposit.
• Format: Banks and Financial Institution (FI) can issue a certificate of deposit in dematerialised form. Although the investor, at their discretion, can seek a certificate in traditional form. Moreover, it attracts stamp duty.
• Loans: Banks or Financial Institutions cannot provide loans against the certificate of deposit. Moreover, they cannot claim for their certificate of deposit before maturity.

Advantages and Disadvantages of CD

Advantages	Disadvantages
CD offers a higher rate when compared with savings or money market account.	If one fails to withdraw the matured amount the existing interest rate will be renewed might be less than other investment options.
The amount invested is safe with a certificate of deposit. However, they are less risky when compared with bonds, stocks and other volatile instruments.	The deposited amount is locked for the specified period and withdrawal of the amount is possible only by remitting the penalty.
The period of seven days is granted to decide further investment of the matured amount.	Interest rates on the certificate of deposit are not associated with the rate of inflation and hence the value of money would decrease with increasing inflation.

Issue of Duplicate Certificate

In case of loss of physical certificate, a duplicate certificate can be obtained only after:

• Notice is given in the local newspaper.
• There has been a lapse for 15 days from the date of the notice of the newspaper.
• Execution of the indemnity bond has to be done by the investor. 

The duplicate certificate only to be issued in the physical form. There is no stamping required as the duplicate certificate is provided against the loss of the certificate of deposit. The duplicate certificate of deposit should state that the original value, due date and date of issue.

Trades in CD

All Over The Counter (OTC) trades in the certificate of deposit has to be reported within 15 minutes of the trade on the F-TRAC reporting platform.

Settlement

All OTC trades in the certificate of deposit should be cleared and settled through the authorised clearinghouses such as Indian Clearing Corporation Limited (ICCL), National Securities Clearing Corporation Limited (NSCCL) and MCX Stock Exchange Clearing Corporation Limited of the stock exchanges.

Payment of Certificate

Since the certificate of deposit is transferable, the physical certificate can be presented for payment by the new investor. The holders of certificate of deposit will have to approach the depository participants to transfer the security specified by the specific International Securities Identification Number (ISIN) to the CD redemption account maintained by the issuer. The new holders should intimate the issuer by a letter or fax enclosing the copy of the delivery instruction that had been provided to their respective depository participants. On receipt of the demand credit of certificate of deposit in the CD redemption account, the issuer on maturity date would prepare to repay the holders in the form of banker cheque or high-value cheque, etc.

Accounting

Banks or Financial Institutions would account the price under the head “CD issued”. Accounting entries towards the discount will be performed in the case of “Cash Certificates”. The financial institution or banks is required to maintain a register of CD issued with the complete details.

Documentation

FIMMDA (Fixed Income Money Market and Derivatives Association of India) would consult RBI, for the smooth functioning of the CD market, any documentation a standardised procedure that are to be followed by the participants, in correspondence with the best practices. Banks or Financial Institutions can refer to the guidelines issued by the FIMMDA with respect to this and has amended from time to time.

Reporting

The bank should include the amount of certificate of deposit under Section 42 of the RBI Act. Further, banks or financial institution should report the data on issuance of Certificate of deposit (CDs) under the Online Returns Filing System (ORFS) in ten days.