Certificate of Deposit in India: Definition, Features and Types

Certificate of Deposit or CD is a financial instrument that provides fixed returns and can be issued by a scheduled commercial bank, regional rural bank, small finance bank or any All India Financial Institution. CDs in India are governed under rules specified by the Reserve Bank of India (RBI) and currently issued only in dematerialized form. In the case of floating-rate CDs, the rate of return offered is liable to change periodically, however, the instrument will provide fixed returns during each period once the coupon rate is declared.

A certificate of deposit is usually issued at a discount applicable to its face value and provide a fixed rate of return to the investor. Similar to bonds in India, CDs are issued with pre-determined maturity period and they can be traded on a money market. As per current rules, any resident in India can invest in CDs.

The Certificate of Deposit's key characteristics are as follows:

• Eligible Issuers: As per current RBI rules for CDs in India, All India Financial Institution, scheduled commercial banks, small finance banks and regional rural banks are authorized to issue certificates of deposit.
• Maturity Period: The maturity period for a Certificate of Deposit issued in India cannot be less than 7 days or more than 1 year. The minimum denomination allowed for an Indian certificate of deposit is Rs. 5 lakh. Higher value CDs can be in multiples of Rs. 5 lakh.
• Issuance and Transferability: CDs in India can only be issued in dematerialised (Demat) form and held with a SEBI-registered depository. Demat certificates of CD can be freely transferred to other eligible investors through secondary market such as the recognized stock exchange.
• Loan Availability: Because these securities have no lock-in period, banks do not offer loans secured by them. Banks are also prohibited from repurchasing certificates of deposit before they mature. They must first take into account the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) before determining the rate of return offered on a Certificate of Deposit.

Despite the minimum investment of Rs. 5 lakh that is required to invest in a certificate of deposit, this investment does feature some key benefits that one needs to keep in mind:

• A certificate of deposit is a relatively low-risk financial product with guaranteed amounts at maturity so is unaffected by volatility in equity markets. Additionally, CDs Typically offers higher returns than traditional term deposits in India.
• CDs in India are allowed to have a maturity period between 7 days and 1 year, so they are ideally suited for short-term parking of funds. The short maturity period also reduces the overall risk associated with this money market instrument.
• What’s more, they can be traded on money markets similar to shares. So, investors need not hold the investment till maturity, unlike a recurring deposit or Fixed Deposit , in case one needs quick access to funds.

The steps for purchasing and selling CDs are the same as those for buying and selling shares and are as follows:

• Step 1: The vendor and the buyer must agree on the transaction's terms, including its price and level of quality.
• Step 2: Using the delivery instruction slip, the supplier will allow its depository participants.
• Step 3: The slip will include instructions on how to deduct money from the seller's account and transfer the CD to the buyer's account.
• Step 4: If you're still unclear, you can also seek professional guidance.

When a person wants to increase their return on investment without taking on the risk associated with equities such as, equity mutual funds, certificates of deposit offers a low risk alternative. You should carefully study the fine print even though the interest rates can be higher than those offered by many other fixed return investments. What’s more the short maturity period of the CD ensures that your money will not get locked-in for long periods unlike in the case of Government Securities and Corporate Bonds.