Certificate of Deposits

By Group 7

Certificate of Deposits

CD is a short term money market instrument used by banks to raise bulk deposits.

Banks and Financial Institutes can issue this. Investors can be Individuals (other than minor) and Non Individuals.

It is issued at a discount to face value as an unsecured usance promissory note.

The period is minimum 7 days and maximum 12 months ,For FIs the period is 1 3 years.

Rate of interest is market determined.(It keeps on changing, fluctuating )

Minimum amount can be Rs. 1 lakh, There is no

restriction on maximum amount. It is in multiple of

1 lakh.

CRR and SLR requirements are applicable on amount of CD.

Liquidity

No loan can be given on security of CD. It can be transferred anytime and any number of times, by endorsement and delivery.

It can be issued in demat format only. If it matures on a holiday , payment is required to be made on the previous business day.

Meaning

The term Certificate of Deposit or CD refers to money market instruments of relatively short duration or savings accounts that pay a fixed rate or fluctuating of interest until a given maturity date.

Funds placed in a Certificate of Deposit usually cannot be withdrawn prior to maturity or they can perhaps only

be withdrawn with advanced notice or by having a

penalty assessed.

Features

It Can be issued by Scheduled Commercial Banks (Except RRBs and Co-operative Banks) and Selected Financial Institution (Permitted by RBI )

NRIs can also subscribe on non repatriable basis.

Loan Against collateral of CD not permitted.

Banks have to maintain appropriate reserve requirements, i.e., cash reserve ratio (CRR) and statutory liquidity ratio (SLR), on the issue price

of the CDs.

Advantages

Offer a higher rate of interest than Treasury bills and Savings account .

Safe way to make investments for a short or medium period of time.

Return on investment is ensured despite the rate fluctuations in the market.

Insured by Federal Deposit Insurance Corporation.

The return on CDs is assured and helps in financial planning.

Very easy to buy a CD.

CDs can be purchased and sold through a

brokerage firm.

Disadvantages

Money is tied down for long durations of time. As the rate of interest is fixed, it is difficult to change or to take advantage of the market situation when

the market rates are favorable.

Though the return rate is higher on CDs than

savings account, it is much lower than other money

market instruments.

According to the federal regulations, FDIC will insure CDs up to the maximum amount of Rs1,00,000 in a single financial institution.

Example

Mr.X wishes to borrow Rs. 30 Lakhs for his new buiness venture by next week.

He goes to his bank to ask for the loan. The bank agrees to provide a loan, it realizes

that it has only Rs. 20 lacs at present.

Now the bank does not wish to lose him to another bank.

So the bank asks him to come back later to collect the loan amount at lets say 15%.

The bank has corporate relationships from whom they can borrow.

In order to borrow, they issue Certificates of

Deposit to these corporate relationships who in turn

subscribe to them.

Obviously the rate of interest offered by the bank to the corporate institutions would be higher than the regular fixed deposits.

Thus money comes into the bank and is offered

to Mr.X.

How CDs Work!

Borrower Approaches Bank

Bank Lends Money

Inter corporate deposits

Inter corporate deposits

Inter-Corporate Deposit is essentially a short term assistance provided by one corporate with surplus funds to another in need of funds.

A deposits made by one with another, normally for a

period up to six months, is referred to as an inter corporate deposits.

Features

They are for a very short period of time i.e 3 months or 6 months. They are unsecured source for raising funds. They are not regulated by any law.

It is a relationship based borrowing made by the company. They involve high risk and high returns. Useful in solving temporary capital crisis.

The market of inter-corporate deposits maintains secrecy.

The brokers in this market never reveal their lists of

lenders and borrowers, because they believe that if

proper secrecy is not maintained the rate of interest can fall abruptly.

The market of inter-corporate deposits depends crucially on personal contacts.

The decisions of lending in this market are largely governed by personal contacts.

Types of ICD

3months deposits 6months deposits and Call deposits

3 month deposits

Three month deposits are the most popular type of inter-corporate deposits.

These deposits are generally considered by the

borrowers to solve problems of short-term capital

inadequacy.

The annual rate of interest given for three month deposits is 12%.

6 Month deposits

Six month deposits is a deposit made for six months.

The annual interest rate assigned for this type of

deposit is 15%.

Call deposits

The concept of call deposit is different from the previous two deposits. On giving a one day notice, this deposit can be withdrawn by the lender.

The annual interest rate on call deposits is around

10%.

Example
ATMARAM FINANCIAL Features As per company rules SERVICES
Product Brief Inter-corporate deposits are deposits made by one company with another company Only Limited Companies Rupees One Lakh Only Any 90 days 180 days

Who can apply Minimum Amount Maximum Amount Minimum Term Maximum Term

Applicable Charges
Interest Rate TDS Stamp Duty Brokerage 12% to 17% pa - Always Upfront 20.6% (as per income tax rules) Not Applicable 0.10% - 0.25% per month

Finance Charges
Service Tax

0.10% - 0.25% per month (If Applicable)

As per Government Notification

THANK YOU