Basic concepts
What is a Certificate of Deposit (CD)?
DEFINITION
A Certificate of Deposit (CD) is a negotiable money market instrument issued by banks and financial institutions to raise short-term funds from investors at a fixed interest rate and for a fixed maturity period. It is similar to a fixed deposit but tradable, especially in the institutional money market.
Who Can Issue CDs in India?
| Issuer | Regulator |
|---|---|
| Scheduled Commercial Banks | RBI |
| Select Financial Institutions (e.g. SIDBI, NABARD) | RBI |
Tenure : Minimum: 7 days to Maximum: 1 year (for banks) and up to 3 years for financial institutions
Key Features
| Feature | Description |
|---|---|
| Denomination | Minimum ₹5 lakh and multiples thereof |
| Form | Issued in dematerialized (Demat) form |
| Tradability | Yes – OTC or NDS-OM platform |
| Interest Type | Discounted (zero-coupon) or coupon-based |
| Transferability | Freely transferable before maturity |
| Stamp Duty | Applicable as per Indian Stamp Act |
Where are CDs Traded?
| Market | Platform |
|---|---|
| Primary Market | Direct placement via brokers |
| Secondary Market | Over-the-counter (OTC), NDS-OM |
| Settlement | Clearing Corporation of India Ltd (CCIL) |
Who Buys CDs?
- Mutual Funds
- Insurance Companies
- Corporates
- HNIs (High Net-Worth Individuals)
- Banks and NBFCs
Why Do Banks Issue CDs?
- To manage short-term liquidity
- To raise bulk funds quickly
- As an alternative to borrowings from RBI or call money market
Risks & Considerations
| Risk Type | Details |
|---|---|
| Liquidity Risk | May not find buyers in secondary market easily |
| Interest Rate Risk | Value fluctuates with market interest rates |
| Credit Risk | Minimal for CDs from strong banks (but exists) |
Summary
| Attribute | Detail |
|---|---|
| Instrument Type | Money market, short-term debt |
| Issued By | Banks, financial institutions |
| Tradable | Yes (unlike fixed deposits) |
| Purpose | Short-term fundraising tool |
| Investors | Institutional and large retail |
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