CERTIFICATE OF DEPOSIT : A Certificate of Deposit is a time deposit with a commercial
bank but can be negotiated. Such deposit carries attractive interest rate. The denomination
of the deposit is also substantial. Institutional investors and companies take interest in this
avenue of investment.
The Certificate of Deposit (CD) is a document of title similar to a time deposit receipt
issued by a bank. It is a bearer document readily negotiable. It is beneficial to the banker
as well as investor. The banker is not required to encash the CD before the date of
maturity and hence it is an assured fund for a minimum period. The investor is assured of
ready liquidity. In case of need he can sell the CD in the secondary market. With effect
from April, 1998, the maturity of CD is between 15 days and one year. The minimum size
of the issue of a single investor is ` 5 lakhs in denominations of ` 1 lakh and its multiples.
CDs can be issued only by scheduled commercial banks excluding Regional Rural Banks.
There is no prescribed interest rate on CDs and the banks have the freedom to issue CDs
at discount or face value.
Certificate of Deposit represents a bank deposit which is transferable from person to
person. It is a marketable or negotiable short-term instrument in bearer form. CD is an
interest bearing, maturity-dated obligation of a bank. It is a part of bank’s time deposit. It is
negotiable because it is payable either to the bearer or to the order of the depositor. It can
be sold to any one or it can be traded on the secondary market. Liquidity and marketability
are the distinguishing features of CD. They are riskless in terms of default of payment of
interest and principal.
CDs are obligations of banks. They are usually issued at face value on which fixed rate of
interest is paid. They are traded on a bond-yield equivalent basis. The CDs are also issued
at a discount to its face value like Treasury bills or commercial bills. Banks can issue or
sell CDs either directly to the investors or through the dealers. They may be issued on the
initiative of secondary market dealers. Apart from compliance of the overall assets capital
gearing, there is no other ceiling prescribed for banks to issue CDs. Banks usually can not
buy back their own CDs. Banks can issue CDs at a rate which is lower than the rates for
deposits of the same maturity. CDs are issued by banks, particularly by large banks for
attracting large corporate deposits. Thus, the major holders of CDs are cash-rich business
firms of varying sizes and money funds. The Government, Central bank, non-bank
financial institutions and individuals can also buy CDs. Banks themselves may buy and sell
CDs in the secondary market but they are reluctant to invest in them. Many firms tend to
hold CDs till maturity and hence the development of secondary market has not been taking
pace in India.
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