Published : December 28, 2018
There are very few options for short-term investments in India for retail investors. Certificate of deposit is one of them. Due to the very nature debt instruments covers all short-term investments. With this logic certificate of deposit are debt instruments. The short form of a certificate of deposit, i.e. CD is popular among the investment community in India. However, there is very limited participation of retail investors in the certificate of deposit. This is mainly due to unawareness about the available options in this space.
So the sole objective of writing this very blog is to create awareness among retail investors. Awareness relating to this instrument for parking your short-term surplus funds. It is also true that any investment comes with a varying degree of risks. So is the certificate of deposit. However, as we will proceed reading, you will agree to keep it in low-risk investment category.
Before detailing further, I consider outlining the proceeding on this blog. I Will cover all the basics that any retail investor must understand before taking up investment decision. One of the major hurdles a retail investor faces in making investment decision is where to look for relevant information. So I will detail a list of available CD in India. Also with the list, I will also give some vital statistics. This will help them choose some certificate of deposit for their own investment portfolio.
So let us start.
As per the RBI, a certificate of deposit is a negotiable money market instrument. A negotiable instrument guarantees for the repayment of principal amount along with the pre-specified earnings. One more benefit of such an instrument is that you can demand the payment or can get at the set time. Moreover, you also know the issuer of such instrument. The RBI is the apex body and issues guidelines for the issue of the certificate of deposit in India.
Banks both national and foreign, along with financial institutions can issue such certificates. Please note that only scheduled commercial banks can issue CDs. Regional rural banks and local area banks do not have permission to issue CD. They issue CD in electronic form (dematerialise form) or as Usance Promissory Note (paper certificate). However, for such an issue, they need to keep funds with eligible banks or financial institutions.
The RBI permits individuals, corporations, companies, banks, trusts, funds, associations to purchase a certificate of deposit. There are some limitations to NRIs (Non-Resident Indians). NRIs can subscribe to Indian certificate of deposits. However, they have permission to subscribe only on a non-repatriable basis. It means that the NRI holder of the CDs cannot endorse it to another NRI in the secondary market. As a single subscriber, you can invest in CDs for INR 1 lac and in multiples of INR 1 lac only.
You can freely transfer you CD by endorsing and delivering if it is in physical form. The trading mechanism in the demat form is similar to stocks holding in demat format. Further, there is also no lock-in period for holding a certificate of deposit. Both NSE and BSE facilitates trading in a certificate of deposits for retail investors.
Banks can issue CDs for 7 days up to 1-year duration. While financial institutions can issue for 1 year and up to 3 years of maturity. Generally, all issuers need to maintain additional CRR and SLR on the issue price of the CDs. CRR stands for cash reserve ratio and SLR stands for statutory liquidity ratio. Both banks and financial institutions need to maintain CRR and SLR with RBI.
Banks and financial institutions issue certificate of deposit on two bases. CD as a discount on face value or alternatively as on a floating rate basis. An issuer is free to determine the discount rate or the coupon rate. However, the method of calculating floating rate should be objective, transparent and market-based. The rate of interest on floating rate CDs is reset periodically. It is done on a spread over a transparent benchmark. Thus as a retail investor, you need to check before investing that whether a particular certificate of deposit is on face value discount on are floating rate basis. From this, you can calculate your annualised income.
As on the date of writing this blog article, there was a total 37 issuer of the certificate of deposit in India. Both national and international commercial banks and some financial institutions offer the certificate of deposit on a regular basis. The average yield from such Cds is around 7%. While selecting one for your portfolio you must consider who the issuer is. If you want to keep your risk at minimal then go for CDs by a nationalised bank. Further, keep in mind that liquidity is of prime importance if you want to trade before the redemption date in a secondary market. So higher the units settled, the better the liquidity in the secondary market.
|S.No||Banks/FI||Total Units Settled (till Nov 18)||Average Yields|
|1||AXIS BANK LIMITED||14618020||7.00|
|2||IDFC BANK LIMITED||13312435||6.84|
|3||INDUSIND BANK LIMITED||10293482||7.17|
|4||HDFC BANK LIMITED||7519565||7.07|
|5||ICICI BANK LIMITED||6332790||6.93|
|7||YES BANK LIMITED||4458610||7.19|
|8||RBL BANK LIMITED||2542050||7.03|
|9||KOTAK MAHINDRA BANK LIMITED||2317400||6.89|
|10||THE SOUTH INDIAN BANK LTD.||2162955||6.84|
|11||SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA||2106180||7.55|
|13||UNION BANK OF INDIA||1420950||6.76|
|14||PUNJAB AND SIND BANK||1231000||6.56|
|15||NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT||1122990||7.37|
|16||THE JAMMU AND KASHMIR BANK LIMITED||1023240||7.05|
|18||ORIENTAL BANK OF COMMERCE||971000||6.89|
|19||THE FEDERAL BANK LIMITED||897400||6.71|
|20||EXPORT-IMPORT BANK OF INDIA||842300||7.41|
|21||PUNJAB NATIONAL BANK||735500||6.30|
|23||BANK OF BARODA||583000||6.70|
|24||THE KARNATAKA BANK LIMITED||563425||6.76|
|26||DCB BANK LIMITED||324650||7.21|
|27||THE KARUR VYSYA BANK LIMITED||217500||6.70|
|28||AU SMALL FINANCE BANK LIMITED||109570||7.26|
|29||UJJIVAN SMALL FINANCE BANK LIMITED||80350||7.20|
|30||BANDHAN BANK LIMITED||78600||6.72|
|31||CREDIT SUISSE AG||70000||7.06|
|32||COOPERATIEVE RABOBANK U.A||37650||7.16|
|33||EQUITAS SMALL FINANCE BANK LIMITED||36743||7.34|
|34||ABU DHABI COMMERCIAL BANK PJSC||12000||6.84|
|35||UTKARSH SMALL FINANCE BANK LIMITED||5000||8.46|
|36||INDUSTRIAL AND COMMERCIAL BANK OF CHINA LIMITED||2500||6.25|
|37||SURYODAY SMALL FINANCE BANK LIMITED||500||7.89|
|Source – NSE Website|
Buying and selling of certificate of deposits in the demat format are done similar to buying and selling of shares. First of all buyers and sellers agrees upon price and quantity of CDs for the transaction. Then after this, the seller authorises its DP (depository participant) through delivery instruction slip. Instruction to debit sellers accounts and transfer the CD to buyers account. Buyer need not have an account with the seller’s DP.
It is the seller’s DP responsibility to transfer the quantum of the sold CD to the buyers account even if the DP is different. Buyers receive CD immediately after the transaction. However, for this, the seller must give one-time standing instruction to its DP for the same.
One important point to note here is that the settlement of funds between buyers and sellers is done outside the ambit of NSDL. Like for shares, NSDL is also the authorised depository for the certificate of deposits in India. The fund’s settlements for transactions in CDs in the secondary market is done through authorised stocks brokers itself.
With investment in a certificate of deposit, you always have an option to exit with no loss in the secondary market. However, if you hold a certificate of deposit till maturity, you need to know the redemption process in details. An investor that holds a certificate of deposit till maturity, technically he becomes a “beneficiary holder”. Each CD issuer is required to open a redemption account. They open it with an authorised depository participant before the issue is open.
A beneficiary holder needs to submit DIS to his/her DP to transfer his/her CD holding to the issuer’s redemption account. Please note that you have to submit the DIS at least two days prior to the maturity date of the CD. Only when the issuer receives your CD in his redemption account, it initiates with the steps of payment. If you delay with the DIS, you redemption will get more delayed.
Before answering this question lets look at the basics on which both types of deposits work. We need to understand from two aspects the difference between a certificate of deposit and bank deposit. The return perspective and the investment horizon aspect. Let us first discuss the investment horizon aspect. Banks do have as low as 7 days of deposit schemes. You can park your short-term surplus even for one day with a certificate of deposit.
However, the problem is not with this. When you need money instantly then with your bank’s deposits you will need to pre-mature your deposits. Here lies the twist. Even with 7 days fixed deposit schemes when you will go for premature, there are penalties you need to pay. In some cases, it will even cost some portion of your principal amount also. Forget about the interest income.
Since you can invest for as low as for 1 day and there is a secondary market for a certificate of deposit, prematurity is not an issue. So no as such cost associated with this. Whenever you need money, just withdraw it. However, you need to keep in mind that INR 1 lac is a minimum need for investing in a CD. While you can just do bank deposits with INR 100.
Now comes the return perspective. Low durations bank deposits attract very low yield. In contrast yield on the certificate of deposits is high. The 7 days bank fixed deposits will give in between 3.5% to 5.5% annualised return. Whereas, the yearly yield of the certificate of deposits is around 7%.
Thus, for funds with short-term surplus characteristics, certificate of deposits is the better option than bank deposits. If you do not have any short-term need of your surplus, you may prefer bank deposits. However, who knows the future. You may need money anytime in the future. So a judicious mix of investments in certificate of deposits and bank deposits must be a good midway.
Raghunandan Money Demat account is your gateway to a safe, secure, hassle-free & customer friendly services for investing in various investment products like shares, mutual funds, IPOs, bonds, NCDs including the certificate of deposits. You can read about our depository services before signing up with us on the same page. Just leave your name, mobile number and email, our representative will connect with you. Even you can comment in the comment section of this blog article. You can discuss in details about your plan for short duration investment planning, including investing in a certificate of deposit.
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