Description
The PPT describes on Certificate of Deposit which is a negotiable money market instrument and issued in dematerialised form as a usance promisory note.
Agenda
? CD – What is it & Why is it issued?
? Features & Types of CD ? How do CDs work ? ? Costs of issuing CDs ? CDs in India ? Agencies involved & Regulatory purview ? Advantages / Disadvantages
Introduction
CERTIFICATE OF DEPOSIT(CD) is a negotiable money market instrument and issued in dematerialized form or as a usance Promissory Note, for funds deposited at a bank or other eligible financial institution for a specified time period. CDs issued by banks should not have the maturity less than seven days and not more than one year. Financial Institutions are allowed to issue CDs for a period between 1 year and up to 3 years.
CDs can be issued to
? Individuals ? Corporations ? Companies, ? Trusts, funds, ? Associations, etc. ? Non-Resident 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.
Introduction
CDs can be issued by ? Scheduled commercial banks excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs) ? Select all-India Financial Institutions that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI
Difference Between CDs and Term Deposits: ? 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 savings account. ? 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.
Introduction
Methods to express Returns: ? Annual Percentage Yield (APY) In APY method, interest earned is based on compounded interest calculation.
?
Annual Percentage Rate (APR). In APR method, simple interest calculation is done to generate the return.
? Hence if the interest is paid annually, equal return is generated by both APY
and APR methods. However, if interest is paid more than once in a year there is a difference.
Agenda
? CD – What is it & Why is it issued?
? Features & Types of CD ? How do CDs work ? ? Costs of issuing CDs ? CDs in India ? Agencies Involved & Regulatory purview ? Advantages / Disadvantages
Features of CD
? A CD is a time deposit with a bank.
? Like most time deposit, funds cannot be withdrawn
before maturity without paying a penalty. ? CD’s have specific maturity date, interest rate and it can be issued in any denomination. ? The main advantage of CD is their safety. ? Anyone can earn more than a saving account interest.
Types of CDs
? Callable CD
? Brokered CD ? Bump Up CD ? Liquid CD ? Step Up or Step Down CD ? Variable rate CD ? Add on CD ? Zero Coupon CD
Agenda
? CD – What is it & Why is it issued?
? Features & Types of CD ? How do CDs work ? ? Costs of issuing CDs ? CDs in India ? Agencies involved & Regulatory purview ? Advantages / Disadvantages
How do CDs work?
? Issuing a CD
- Banks can issue CDs depending on their requirement - FIs – issue of CD together with other instruments not to exceed 100% of its own net owned funds - May be issued at a discount to face value - CDs may also be issued on a floating rate basis; issuer free to determine the discount/coupon rate - Minimum Rs.1,00,000 & multiples thereof - Paper certificate / Dematerialized format
? Interest Payouts
- Periodically paid out as and when accrued - Accumulated to earn compound interest
How do CDs work?
? Maturity
- Minimum 7 days to Max 12 months for banks - Minimum 1 year to Max 3 years for FIs - Withdrawals before maturity not allowed - Can be resold in the secondary market - No grace period for the repayment of CDs
? Refinancing
- Loan against a CD as a collateral is not allowed - Banks / FIs are not allowed to buyback their own CDs before maturity
? Issue of duplicate Certificates
- 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 - Execution of an indemnity bond by the investor to the satisfaction of the issuer of CDs.
Costs involved in issuing CDs…
Following are the costs involved in issuing CDs:
? Stamp Duty: The issuer has to pay the relevant stamp duty as
applicable irrespective whether it is issued in either physical or dematerialized form.
? Rating Fees
? Depository Charges: NSDL: Rs.10,000 (Plus Service Tax) for five
issues made in a financial Year & an additional fees of Rs.10,000 (Plus Service Tax) levied for every additional five issues.
Stamp duty
? Certain concessions are available in stamp duties to
certain class of investors (commercial and co-operative banks and specified FIs like IFCI, IDBI, SFCs)
Maturity period 3 months Eligible class of investors* 0.50 Non-eligible class of investors* 1.25
3 months to 6 months
6 months to 9 months 9 months to 12 months 12 months to 24 months
1.00
1.50 2.00 4.00
2.50
3.75 5.00 10.00
24 months to 36 months
6.00
15.00
*Stamp duty applicable per Rs 1000 (in Rs)
Agenda
? CD – What is it & Why is it issued?
? Features & Types of CD ? How do CDs work ? ? Costs of issuing CDs ? CDs in India ? Agencies involved & Regulatory purview ? Advantages / Disadvantages
Certificate of Deposit in India
? Introduced in July 1989, to enable the banking system to mobilise bulk ?
?
? ?
deposits from the market, which they can have at competitive rates of interest. Who can issue: 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, corporations, companies, trusts, funds, associations etc Nature Usance Promissory note. Can be issued in Dematerialisation after 2002.
Features specific to India
? Maturity period is Minimum 7 days Maximum: 12 Months for ? ? ? ? ? ?
CDs issued by banks. For CDs issued by Financial institutions maturity is minimum 1 year and maximum 3 years. Minimum amount to invest in a CD is Rs 1 lakh Loan against collateral of CD is not permitted (It’s possible in ‘sight fixed deposits’) Premature withdrawal is not allowed (can be sold to other investors) Interest rate can be fixed or floating They are issued at a discount to face value like zero coupon bonds NRIs can also subscribe to CDs, but on non-repatriable basis only. In secondary market such CDs cannot be endorsed to another NRI.
Agenda
? CD – What is it & Why is it issued?
? Features & Types of CD ? How do CDs work ? ? Costs of issuing CDs ? CDs in India ? Agencies involved and regulatory purview ? Advantages / Disadvantages
ISSUERS
? Can be issued by:-
- Scheduled Commercial banks excluding RRB’s and Local Area banks - Select all-India Financial institutions
? Have to follow Umbrella Limit
? Need to maintain appropriate reserve requirements
? Minimium amount Rs 1 Lac and multiples of it
SUBSCRIBERS
Rating Agencies
? CDs are approved by
? CARE ? ICRA ? CRISIL ? FITCH
Reporting
? Banks should include amount of CDs in fortnightly
return. ? Should submit the fortnightly return to RBI ? The details of the reporting
? Total amount of CDs outstanding as at the end of the fortnight
1. On Discount Value Basis (Rs. Crore) Face Value : Discounted Value : 2. On Coupon Bearing Basis (Rs. Crore) Face Value :
? CDs issued on Discount value basis and floating rate basis
? ? ? ?
Discounted or face value of CDs Maturity period (in Days) Effective interest rate OR benchmark and spread Demat or physical form
Role of DFHI
? Functions as market maker in CDs market ? Offers bid and offer rate for CDs ? Acts as an ideal conduit for disinvestments of CD
holdings ? Engages in buying CDs from the bank at bid discount rate
Advantages
? Insured by DICGC
? Cost of raising funds lower
? Tradable
? Low minimum Investment
Criticism
? Loan against collateral of CD is not permitted
? Premature withdrawal is not allowed ? Insurance Cover ? Mostly callable ? Stamp Duty
References:
? http://en.wikipedia.org/wiki/Certificate_of_deposit
? http://rbidocs.rbi.org.in/rdocs/notification/PDFs/8535
6.pdf ? http://www.bankingindiaupdate.com/cd.htm ? http://rbi.org.in/scripts/NotificationUser.aspx?Mode= 0&Id=4287 ? http://lastbull.com/certificates-of-depositcd/ ? http://www.dicgc.org.in/GuideToDepositInsuranceInI ndia.htm
Thank you
doc_149470917.ppt
The PPT describes on Certificate of Deposit which is a negotiable money market instrument and issued in dematerialised form as a usance promisory note.
Agenda
? CD – What is it & Why is it issued?
? Features & Types of CD ? How do CDs work ? ? Costs of issuing CDs ? CDs in India ? Agencies involved & Regulatory purview ? Advantages / Disadvantages
Introduction
CERTIFICATE OF DEPOSIT(CD) is a negotiable money market instrument and issued in dematerialized form or as a usance Promissory Note, for funds deposited at a bank or other eligible financial institution for a specified time period. CDs issued by banks should not have the maturity less than seven days and not more than one year. Financial Institutions are allowed to issue CDs for a period between 1 year and up to 3 years.
CDs can be issued to
? Individuals ? Corporations ? Companies, ? Trusts, funds, ? Associations, etc. ? Non-Resident 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.
Introduction
CDs can be issued by ? Scheduled commercial banks excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs) ? Select all-India Financial Institutions that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI
Difference Between CDs and Term Deposits: ? 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 savings account. ? 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.
Introduction
Methods to express Returns: ? Annual Percentage Yield (APY) In APY method, interest earned is based on compounded interest calculation.
?
Annual Percentage Rate (APR). In APR method, simple interest calculation is done to generate the return.
? Hence if the interest is paid annually, equal return is generated by both APY
and APR methods. However, if interest is paid more than once in a year there is a difference.
Agenda
? CD – What is it & Why is it issued?
? Features & Types of CD ? How do CDs work ? ? Costs of issuing CDs ? CDs in India ? Agencies Involved & Regulatory purview ? Advantages / Disadvantages
Features of CD
? A CD is a time deposit with a bank.
? Like most time deposit, funds cannot be withdrawn
before maturity without paying a penalty. ? CD’s have specific maturity date, interest rate and it can be issued in any denomination. ? The main advantage of CD is their safety. ? Anyone can earn more than a saving account interest.
Types of CDs
? Callable CD
? Brokered CD ? Bump Up CD ? Liquid CD ? Step Up or Step Down CD ? Variable rate CD ? Add on CD ? Zero Coupon CD
Agenda
? CD – What is it & Why is it issued?
? Features & Types of CD ? How do CDs work ? ? Costs of issuing CDs ? CDs in India ? Agencies involved & Regulatory purview ? Advantages / Disadvantages
How do CDs work?
? Issuing a CD
- Banks can issue CDs depending on their requirement - FIs – issue of CD together with other instruments not to exceed 100% of its own net owned funds - May be issued at a discount to face value - CDs may also be issued on a floating rate basis; issuer free to determine the discount/coupon rate - Minimum Rs.1,00,000 & multiples thereof - Paper certificate / Dematerialized format
? Interest Payouts
- Periodically paid out as and when accrued - Accumulated to earn compound interest
How do CDs work?
? Maturity
- Minimum 7 days to Max 12 months for banks - Minimum 1 year to Max 3 years for FIs - Withdrawals before maturity not allowed - Can be resold in the secondary market - No grace period for the repayment of CDs
? Refinancing
- Loan against a CD as a collateral is not allowed - Banks / FIs are not allowed to buyback their own CDs before maturity
? Issue of duplicate Certificates
- 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 - Execution of an indemnity bond by the investor to the satisfaction of the issuer of CDs.
Costs involved in issuing CDs…
Following are the costs involved in issuing CDs:
? Stamp Duty: The issuer has to pay the relevant stamp duty as
applicable irrespective whether it is issued in either physical or dematerialized form.
? Rating Fees
? Depository Charges: NSDL: Rs.10,000 (Plus Service Tax) for five
issues made in a financial Year & an additional fees of Rs.10,000 (Plus Service Tax) levied for every additional five issues.
Stamp duty
? Certain concessions are available in stamp duties to
certain class of investors (commercial and co-operative banks and specified FIs like IFCI, IDBI, SFCs)
Maturity period 3 months Eligible class of investors* 0.50 Non-eligible class of investors* 1.25
3 months to 6 months
6 months to 9 months 9 months to 12 months 12 months to 24 months
1.00
1.50 2.00 4.00
2.50
3.75 5.00 10.00
24 months to 36 months
6.00
15.00
*Stamp duty applicable per Rs 1000 (in Rs)
Agenda
? CD – What is it & Why is it issued?
? Features & Types of CD ? How do CDs work ? ? Costs of issuing CDs ? CDs in India ? Agencies involved & Regulatory purview ? Advantages / Disadvantages
Certificate of Deposit in India
? Introduced in July 1989, to enable the banking system to mobilise bulk ?
?
? ?
deposits from the market, which they can have at competitive rates of interest. Who can issue: 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, corporations, companies, trusts, funds, associations etc Nature Usance Promissory note. Can be issued in Dematerialisation after 2002.
Features specific to India
? Maturity period is Minimum 7 days Maximum: 12 Months for ? ? ? ? ? ?
CDs issued by banks. For CDs issued by Financial institutions maturity is minimum 1 year and maximum 3 years. Minimum amount to invest in a CD is Rs 1 lakh Loan against collateral of CD is not permitted (It’s possible in ‘sight fixed deposits’) Premature withdrawal is not allowed (can be sold to other investors) Interest rate can be fixed or floating They are issued at a discount to face value like zero coupon bonds NRIs can also subscribe to CDs, but on non-repatriable basis only. In secondary market such CDs cannot be endorsed to another NRI.
Agenda
? CD – What is it & Why is it issued?
? Features & Types of CD ? How do CDs work ? ? Costs of issuing CDs ? CDs in India ? Agencies involved and regulatory purview ? Advantages / Disadvantages
ISSUERS
? Can be issued by:-
- Scheduled Commercial banks excluding RRB’s and Local Area banks - Select all-India Financial institutions
? Have to follow Umbrella Limit
? Need to maintain appropriate reserve requirements
? Minimium amount Rs 1 Lac and multiples of it
SUBSCRIBERS
Rating Agencies
? CDs are approved by
? CARE ? ICRA ? CRISIL ? FITCH
Reporting
? Banks should include amount of CDs in fortnightly
return. ? Should submit the fortnightly return to RBI ? The details of the reporting
? Total amount of CDs outstanding as at the end of the fortnight
1. On Discount Value Basis (Rs. Crore) Face Value : Discounted Value : 2. On Coupon Bearing Basis (Rs. Crore) Face Value :
? CDs issued on Discount value basis and floating rate basis
? ? ? ?
Discounted or face value of CDs Maturity period (in Days) Effective interest rate OR benchmark and spread Demat or physical form
Role of DFHI
? Functions as market maker in CDs market ? Offers bid and offer rate for CDs ? Acts as an ideal conduit for disinvestments of CD
holdings ? Engages in buying CDs from the bank at bid discount rate
Advantages
? Insured by DICGC
? Cost of raising funds lower
? Tradable
? Low minimum Investment
Criticism
? Loan against collateral of CD is not permitted
? Premature withdrawal is not allowed ? Insurance Cover ? Mostly callable ? Stamp Duty
References:
? http://en.wikipedia.org/wiki/Certificate_of_deposit
? http://rbidocs.rbi.org.in/rdocs/notification/PDFs/8535
6.pdf ? http://www.bankingindiaupdate.com/cd.htm ? http://rbi.org.in/scripts/NotificationUser.aspx?Mode= 0&Id=4287 ? http://lastbull.com/certificates-of-depositcd/ ? http://www.dicgc.org.in/GuideToDepositInsuranceInI ndia.htm
Thank you
doc_149470917.ppt