Certificate of Deposits

Lata Menon - 78 Sachit Kodancha - 66 Vikrant Jadhav - 54

Contents
Definition Genesis

Certificate of Deposits An overview Certificate of Deposits USA

Certificate of Deposits In India RBI Guidelines Players

Definition
A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate and can be issued in any denomination. CDs are generally issued by commercial banks and are insured by the FDIC (Federal Deposit Insurance Corporation). The term of a CD generally ranges from one month to five years.

A certificate of deposit is a promissory note issued by a bank. It is a time deposit that restricts holders from withdrawing funds on demand. Although it is still possible to withdraw the money, this action will often incur a penalty. For example, let's say that you purchase a $10,000 CD with an interest rate of 5% compounded annually and a term of one year. At year's end, the CD will have grown to $10,500 ($10,000 * 1.05).

CDs of less than $100,000 are called "small CDs"; CDs for more than $100,000 are called "large CDs" or "jumbo CDs". Almost all large CDs, as well as some small CDs, are negotiable.

Genesis
Banking Origination: Early European banks of the 1600s had two systems of banking. The first was that of exchange, taking money from one form and converting it the local monetary system. The second was a depository form that took money and gave a receipt to account holders for the amount of money deposited. As banks used the money to loan out as capital sources to merchants, they started to charge interest for the use of the money. In turn, they then had to establish a rate to borrow their own deposits to the customer in order to loan it out for a specified time. This is the beginning of the certificate of deposit that states the account owners has a specified amount of money and will keep that money deposited for a designated period of time for a rate of return.

The Modern Certificate of Deposit: While certificates of deposits, otherwise known as CDs or time certificates, have been around since the the early periods of banking, as legislation was passed to create a national system of financial reserves, the CD became more popular among those seeking long-term earnings on their money. Banks can only loan money that they have under assets. In order to keep assets under management to loan out for a higher rate of return, banks began to use certificates of deposits to entice customers to leave their money in the bank for long durations of time. The interest paid is the cost of being able to loan the money out. It wasn't until 1961 that a fixed rate time certificate was established.

An Overview
CDs are similar to savings accounts in that they are insured and thus virtually riskfree; they are "money in the bank" (CDs are insured by the Federal Deposit Insurance Corporation (FDIC) for banks or by the National Credit Union Administration (NCUA) for credit unions). They are different from savings accounts in that the CD has a specific, fixed term (often three months, six months, or one to five years), and, usually, a fixed interest rate. It is intended that the CD be held until maturity, at which time the money may be withdrawn together with the accrued interest.

Sometimes, CDs that are indexed to the stock market, the bond market, or other indices are introduced.

You dont make any money in bank accounts (in real economic terms), simply because youre not supposed to; On the other hand, bank accounts and CDs are fine for holding cash for a short amount of time.

Certificate of Deposits USA

In the US, the federally required "Truth in Savings" booklet, or other disclosure document that gives the terms of the CD, must be made available before the purchase. Employees of the institution are generally not familiar with this information; only the written document carries legal weight. If the original issuing institution has merged with another institution, or if the CD is closed early by the purchaser, or there is some other issue, the purchaser will need to refer to the terms and conditions document to ensure that the withdrawal is processed following the original terms of the contract.

Certificate of Deposits USA

The CD may be callable. The terms may state that the bank or credit union can close the CD before the term ends. Payment of interest. Interest may be paid out as it is accrued or it may accumulate in the CD. Interest calculation. The CD may start earning interest from the date of deposit or from the start of the next month or quarter.

Right to delay withdrawals. Institutions generally have the right to delay withdrawals for a specified period to stop a bank run.

Withdrawal of principal. May be at the discretion of the financial institution. Withdrawal of principal below a certain minimumor any withdrawal of principal at allmay require closure of the entire CD. A US Individual Retirement Account CD may allow withdrawal of IRA Required Minimum Distributions without a withdrawal penalty.

Certificate of Deposits USA

Automatic renewal. The institution may or may not commit to sending a notice before automatic rollover at CD maturity. The institution may specify a grace period before automatically rolling over the CD to a new CD at maturity. Be careful as some otherwise respectable banks have been known to renew at scandalously low rates.

Fees. A fee may be specified for withdrawal or closure or for providing a certified check.

Penalty for early withdrawal. May be measured in months of interest, may be calculated to be equal to the institution's current cost of replacing the money, or may use another formula. May or may not reduce the principalfor example, if principal is withdrawn three months after opening a CD with a six-month penalty.

Withdrawal of interest. May be limited to the most recent interest payment or allow for withdrawal of accumulated total interest since the CD was opened. Interest may be calculated to date of withdrawal or through the end of the last month or last quarter.

Certificate of Deposits USA

Callable CDs Zero-coupon CD Brokered CDs

Add-on CDs

Bump-up CDs

Variable-rate CDs Step-up CD or step-down CDs

Liquid CDs

Certificate of Deposits In India

This scheme was introduced in July 1989, to enable the banking system to mobilize bulk deposits from the market, which they can have at competitive rates of interest.

CDs are like bank term deposits but unlike traditional time deposits these are freely negotiable and are often referred to as Negotiable Certificates of Deposit. CDs normally give a higher return than Bank term deposit. CDs are rated by approved rating agencies (e.g. CARE, ICRA, CRISIL, and FITCH) which considerably enhance their tradability in the secondary market, depending upon demand. SBI DFHI is an active player in secondary market of CDs.

Certificates of deposits, CDs in short, are used by banks to surge over tight liquidity situations. Corporates usually issue commercial papers for a similar purpose.

RBI Guidelines
Introduction
Certificate of Deposit (CD) is a negotiable money market instrument and issued in dematerialized form or as a Usance Promissory Note against funds deposited at a bank or other eligible financial institution for a specified time period. Guidelines for issue of CDs are presently governed by various directives issued by the Reserve Bank of India (RBI), as amended from time to time.

Eligibility
CDs can be issued by (i) scheduled commercial banks {excluding Regional Rural Banks and Local Area Banks}; and (ii) select AllIndia Financial Institutions (FIs) that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI.

RBI Guidelines
Minimum Size of Issue and Denominations
Minimum amount of a CD should be Rs.1 lakh, i.e., the minimum deposit that could be accepted from a single subscriber should not be less than Rs.1 lakh, and in multiples of Rs. 1 lakh thereafter

Investors
CDs can be issued to individuals, corporations, companies, trusts, funds, associations, etc. NonResident Indians (NRIs) may also subscribe to CDs, but only on non-repatriable basis, which should be clearly stated on the Certificate. Such CDs cannot be endorsed to another NRI in the secondary market.

RBI Guidelines
Maturity
The maturity period of CDs issued by banks should not be less than 7 days and not more than one year, from the date of issue. The FIs can issue CDs for a period not less than 1 year and not exceeding 3 years from the date of issue.

Discount / Coupon Rate

CDs may be issued at a discount on face value. Banks / FIs are also allowed to issue CDs on floating rate basis provided the methodology of compiling the floating rate is objective, transparent and market-based. The issuing bank / FI is free to determine the discount /coupon rate. The interest rate on floating rate CDs would have to be reset periodically in accordance with a pre-determined formula that indicates the spread over a transparent benchmark. The investor should be clearly informed of the same

RBI Guidelines
Reserve Requirements
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.

Transferability
CDs in physical form are freely transferable by endorsement and delivery. CDs in demat form can be transferred as per the procedure applicable to other demat securities. There is no lock-in period for the CDs

Trades in CDs
All OTC trades in CDs shall be reported within 15 minutes of the trade on the FIMMDA reporting platform

RBI Guidelines
Loans / Buy-backs
Banks / FIs cannot grant loans against CDs. Furthermore, they cannot buy-back their own CDs before maturity. However, the RBI may relax these restrictions for temporary periods through a separate notification.

Payment of Certificate
Since CDs are transferable, the physical certificates may be presented for payment by the last holder. The question of liability on account of any defect in the chain of endorsements may arise. It is, therefore, desirable that banks take necessary precautions and make payment only by a crossed cheque. Those who deal in these CDs may also be suitably cautioned.

RBI Guidelines
Format of CDs
Banks / FIs should issue CDs only in dematerialised form. According to the Depositories Act, 1996, investors have the option to seek certificate in physical form. Accordingly, if an investor insists on physical certificate, the bank / FI may inform the Chief General Manager, Financial Markets Department, Reserve Bank of India, Central Office, Fort, Mumbai - 400 001 about such instances separately. Issuance of CDs will attract stamp duty. There will be no grace period for repayment of CDs. If the maturity date happens to be a holiday, the issuing bank/FI should make payment on the immediate preceding working day. Banks / Fis should fix the period of deposit in such a manner that the maturity date does not coincide with a holiday to avoid loss of discount / interest rate.

Issue of Duplicate Certificates

In case of loss of physical certificates, duplicate certificates can be issued after compliance with the following: A notice is required to be given in at least one local newspaper. Lapse of a reasonable period (say 15 days) from the date of the notice in the newspaper and on execution of an indemnity bond by the investor to the satisfaction of the issuer of CDs the duplicate certificate should be issued only in physical form. No fresh stamping is required as a duplicate certificate is issued against the original lost CD. The duplicate CD should clearly state that the CD is a Duplicate one stating the original value date, due date, and the date of issue (as "Duplicate issued on ________").

RBI Guidelines
Security Aspects
Since CDs in physical form are freely transferable by endorsement and delivery, it will be necessary for banks/FIs to see that the certificates are printed on good quality security paper and necessary precautions are taken to guard against tampering with the document. They should be signed by two or more authorised signatories.

Accounting
Banks / FIs may account the issue price under the head "CDs issued" and show it under deposits. Accounting entries towards discount will be made as in the case of "Cash Certificates". Banks / FIs should maintain a register of CDs issued with complete particulars.

RBI Guidelines
Reporting
Banks should include the amount of CDs in the fortnightly return under Section 42 of the RBI Act, 1934 and also separately indicate the amount so included by way of a footnote in the return. Banks / FIs should submit a fortnightly return, as per the prescribed format to the Chief General Manager, Financial Markets Department, RBI, Central Office Building, Fort, Mumbai - 400 001, within 10 days from the end of the fortnight date. Banks are also required to send the requisite information in the prescribed format in an MS Excel/ CSV file via e-mail within 10 days from the end of the fortnight. Data on issuance of CDs, which are being reported in physical form/ through email should also be concurrently reported on the web-based module under the Online Returns Filing System (ORFS).

Certificate of Deposits in a gist

Issuer: Scheduled commercial banks (except RRBs) and All India Financial Institutions within their `Umbrella limit. CRR/SLR: Applicable on the issue price in case of banks Investors: Individuals (other than minors), corporations, companies, trusts, funds, associations etc Minimum Maturity: 7 days Max : 12 Months (in case of FIs minimum 1 year and maximum 3 years). Minimum Amount: Rs.1 lac, beyond which in multiple of Rs.1 lac Interest rate Market related. Fixed or floating

Loan Against collateral of CD not permitted

Pre-mature cancellation Not allowed Transfer Endorsement & delivery. Any time

Nature Usance Promissory note. Can be issued in Dematerialization form only with effect June 30, 2002
Other conditions If payment day is holiday, to be paid on next preceding business day Issued at a discount to face value Duplicate can be issued after giving a public notice & obtaining indemnity

Players
Primary Markets

Nationalized Banks, Private Banks (HDFC Ltd, ICICI- major players)

Secondary Markets

Brokers, Corporates, Mutual funds, Pension Funds, Insurance Companies, etc.

Terms of Trade

Cash Delivery/Credit in Demat Account on the same day of payment ToM - Delivery/Credit in Demat Account on the next day of payment

Market lot of INR 25 Cr. (exceptional basis market lot of 5Cr. or 10 Cr. )when traded in the market

Regulators
Regulation:
Fixed Income Money Market and Derivatives Association of India (FIMMDA) may prescribe, in consultation with the RBI, for operational flexibility and smooth functioning of the CD market, any standardized procedure and documentation that are to be followed by the participants, in consonance with the international best practices. Banks / FIs may refer to the detailed guidelines issued by FIMMDA in this regard on June 20, 2002 and as amended from time to time 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.

Thank You

Acknowledgement: Wikipedia, Investopedia, RBI.org