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What is Certificate of Deposits (CDs)?

You might have heard of banks’ Fixed Deposits (FDs). But do you know about Certificate of Deposits (CDs)?

Certificate of Deposits (CDs)

Certificate of Deposit (CD) is a negotiable, unsecured money market instrument issued by a bank as a Usance Promissory Note against funds deposited at the bank for a maturity period up to 1 year. 

In simple words, it is a certificate issued to the investors by the banks for the funds deposited with them for a period up to 1 year.

Issuers and investors of CDs

CDs can be issued by Scheduled Commercial Banks, Regional Rural Banks, Small Finance Banks and All India Financial Institution.

Any person resident in India can invest in CDs.

Denomination and tenor of CDs

  • CDs are issued in minimum denomination of Rs.5 lakh and in multiples of Rs.5 lakh thereafter. 
  • CDs can be issued with a minimum maturity of 7 days and maximum tenor of 1 year.

Issuance of CDs

  • CDs are issued only in dematerialised form.
  • CDs can be issued at a discount to the face value. For eg. CDs with the face value of Rs.100/- issued at Rs.90/- and at maturity redeemed at face value.
  • CDs can also be issued on a fixed / floating rate basis. The interest rates on the floating rate CDs are reset at periodic rests agreed at the time of issue.

Trading of CDs

CDs can be traded either in Over-the-Counter (OTC) markets or on recognised stock exchanges with the approval of RBI.

Loan against CDs

Banks are not allowed to grant loans against CDs, unless specifically permitted by RBI.

Buyback of CDs

Issuing banks can buyback CDs before maturity. Buyback of CDs is subject to the following conditions –

  • Buyback of CDs can be made only 7 days after the date of issue of the CD.
  • The buyback offer is required to be made to all investors in a particular CD issue on identical terms and conditions. The investors have the option to accept or reject the buyback offer.
  • Buyback of CDs to be at the prevailing market price.

CDs vs Bank FDs

 

 Certificate of Deposits (CDs) Bank Fixed Deposits (FDs)
Meaning It is a certificate issued to the investors by the bank for the funds deposited with them for a period up to 1 year. It is a deposit kept by the depositor with the banks for a fixed period.
Issuers CDs can be issued by Scheduled Commercial Banks, Regional Rural Banks, Small Finance Banks and All India Financial Institution. FDs can be made with any banks in India.
Investors / depositors Any person resident in India can invest in CDs. Any person resident in India can make FDs.
Negotiable It is negotiable money market instrument. It is non-negotiable instrument.
Quantity

 

 Minimum denomination of ₹5 lakh and in multiples of ₹5 lakh thereafter. FDs can be made for any amount.
Tenor Minimum 7 days, maximum 1 year. Minimum 7 days, maximum can be up to 10 years.
Issuance CDs can be issued at discount to face value or at fixed / floating interest rate. FDs are for the amount of deposit.
Interest Rate of interest (on the face value) decided by banks. Rate of interest (on the amount of deposit) decided by banks.
Redemption CDs can be redeemed at maturity (face value + interest) or can be traded in secondary market at the prevailing market price. FDs can be redeemed at maturity (amount of deposit + interest).
Trading

 

 CDs can be traded in secondary market. FDs cannot be traded.
Loans Loans cannot be given against CDs. Loans can be given against FDs.

References

Reserve Bank of India. (2021, June 04). 'Master Direction – Reserve Bank of India (Certificate of Deposit) Directions, 2021'. Retrieved from https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12108


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