Certificate of Deposit (CD) is a money market negotiable instrument equivalent to a usance promissory note. Banks and eligible financial institution issue certificate of deposits (CDs) to raise short-term resources within the umbrella limits fixed by the Reserve Bank. Scheduled banks can issue CDs for a period of 7 days to one a year whereas eligible FIs can issue CDs for maturities from 1 year to 3 years from the date of issue. The certificates may also be issued in dematerialized form.
The individuals, corporations, companies, banks, primary dealers, Trusts, Funds and Association may subscribe to CDs. The Non-Resident Indians (NRIs) may also subscribe to CDs. However, money invested in CDs cannot be either repatriated or endorsed to another NRI in the secondary market.
The CDs are issued for a minimum amount of Rupees one lac at a discount on face value and are issued in multiples of one lakh. Such certificates may be issued at fixed rate or on floating rate basis at a predetermined discount/coupon rate. The interest rate on the basis of floating rate needs to be reset periodically in accordance with prearranged formula.
Whenever a bank issues the certificate of deposit, it shall maintain appropriate CRR & SLR on the issue price and they cannot grant loans against CDs. Banks are not allowed to buy back their own CDs before maturity. However, RBI may relax restrictions at certain circumstances for a temporary period through a separate notification.