Certificate of Deposits And Commercial Paper

Presented by : Vikas choudhary Presented to : Mr. Manoj Kumar

3rd Semester Assistant Professor

Roll no. – 5335 Department of Economics

What is Certificate of Deposits ?

Certificate of Deposits (CD) are term deposit certificates issued by commercial banks and financial institutions at discount to face value, with a maturity period ranging from seven to one year.

CD’s was introduced by RBI in the year 1989 to enable the banking system to mobilize bulk deposits from the market, which they can have at competitive rates of interest.

Certificates of deposits are negotiable money market instruments issued in demate form or as a Usance Promissory Notes. It is also known as Negotiable Certificate of deposits.

CDs normally give a higher return than bank term deposit. The return on the CDs is higher than the Treasury Bills because it assumes a higher level of risk.

Bank Issued CDs, when the deposit growth is sluggish, credit demand is high, and a tightening trend in call rate is evident.

Banks have the freedom to issue CDs depending on their requirements. CDs are governed by the Indian Negotiable Instruments Act of 1881.

There will be no grace period for Repayment of CDs. If the maturity date happens to be holiday, the issuing bank should make payment on the immediate preceding working day. Banks/FIs may, therefore, so fix the period of deposit that the maturity date does not coincide with a holiday to avoid loss of discount/interest rates.

Features of Certificates of Deposits :

1. All scheduled commercial banks except Regional Rural Banks and co-operative banks are allowed to issue CDs without any ceiling.

2. CDs are freely transferable by endorsement and delivery.

3. CDs are highly liquid and marketable.

4. CDs can be issued at discount to face value.

5. Maturity period of CDs is 7 days and maximum 12 months (in case of FIs minimum one year and maximum three years).

6. Pre mature cancellation is not allowed.7. There is no lock-in period for the CDs.8. Banks have to maintain the appropriate reserve requirements, i.e., CRR and SLR, on the issue price of the CDs.9. The minimum size of the Issue of single depositor is Rs. 1 lakh. And additional amount can be in multiples of Rs. 1 lakh. 10. Duplicate CD can be issued after giving a public notice and obtaining indemnity. 11. Buy back of CDs and Loan against collateral of CD is not permitted .

Size of CDs and Issue of Duplicate Certificates :• CDs was introduced by the RBI in July,1989. Originally CDs were issued in

multiples of Rs. 25 lakh subject to the minimum size of each being Rs. 1 crore having a maturity period 3 to 12 months and a lock period of 45 days.

• In 1997, RBI modified its original scheme. In order to increase the investor base, the min. size of issues of CDs by banks and FIs was reduced to Rs. 1 lakh and in the multiple of Rs. 1 lakh.

• Issues of Duplicate Certificates : A notice is required to be given in at least one local newspaper and lapse of

a reasonable period (say 15 days) from the date of the notice. Execution of an indemnity (assurance) bond by the investor to the

satisfaction of the issuer of the CDs. Duplicate certificate can be issued in physical form only.

Advantages of CDs :• One can know the returns from the CDs in advance, so,it is

considered safer. CDs normally gives the higher return than bank saving deposit and Treasury bills.

• Compared to Fixed deposit CDs are freely transferable • CDs can be sold to anyone and CDs are tradable in secondary

market.• CDs are liquid, riskless in terms of default of payment of interest

and principal.

COMMERCIAL PAPER

What is Commercial Paper ?Commercial paper (CP) is short-term loan issued by reputed companies having

sufficient tangible assets.

(Tangible assets include both fixed assets, such as machinery, buildings and land, and current assets, such as inventory. The opposite of a tangible asset is an intangible asset. Nonphysical assets, such as patents, trademarks, copyrights, goodwill and brand recognition, are all examples of intangible assets.)It is an unsecured money market instrument money market instrument Issued in the

form of promissory notes, redeeming at par to the holder at maturity.Only corporates who get an investment grade rating (by agencies like CRISIL or ICRA

or CARE) can issue CP as per RBI rules.

ICRA: Investment Information and Credit Rating Agency; CRISIL: Credit Rating Information Services of India Limited; CARE : Credit Analysis & Research Limited.

Purpose of Introduction of CP :

The RBI introduced commercial paper in India in 1990,with a view to enable highly rated corporate borrowers to diversify their resources of short-term borrowings and raise a part of their requirement at competitive rates from the market.

CPs normally give a higher return than fixed deposits and CDs. Because CPs have higher denominations when compared to the Treasury bills and CDs.

The main purpose of introduction of CP was to release the pressure on bank funds for small and medium sized borrowers and at the same time allowing highly rates companies to borrow directly from the market.

Borrowers of CP and Buyers of CP :

Corporates, primary dealers and all Financial Institution (FIs) are permitted to raise short-term resources under the umbrella limit fixed by the RBI are eligible to issue CP.

CP may be issued to and held by individuals, banking companies , other corporate bodies registered or incorporated in India and unincorporated bodies, NRIs and Foreign Institutional Investors(FIIs) which are permitted to buy CPs.

Features of Commercial Paper:• CPs are issued by companies in the form of usance promissory notes.

• Bank and FIs are prohibited from the issuance of CPs.

• It is issued at a discount on their face value.

• CPs are unsecured loan in nature without any backing of assets.

• CPs can be issued for maturities b/w 7 days and less than one year from the date of issue.

• CPs are issued as per guidelines of RBI.

• The minimum size of an issue to a single investor is to be Rs. 5 lakh and in multiples of Rs. 5 lakh.

• CPs is redeemable at par to the holder on maturity.

• Companies with high credit worthiness can only issue CPs.

• Credit rating is mandatory for the issue of CP and Underwriting the issue of CPs is not permitted.

• No prior approval of RBI is needed to issue CPs.

Procedure for the Issue of Commercial Paper :

• CPs are allowed to issue at a discount on their face value and the company issuing the commercial papers can determine the discount rate. A company intending to issue CPs passes a resolution in the Board meeting approving the issue.

• The resolution passed by the Board of Directors indicates the amount of the issue, discount rate and authorizing officials of the company to execute the relevant documents as per RBI norms.

Requirements for Issuing CP :• The tangible net worth of the issuing company should not be less than Rs.

4 crore and Working capital (fund based) limit of the company should not be less than Rs. 4 crore.

• Corporates are allowed to issue CP up to 100 % of their fund based working capital limits.

• For issuing commercial papers the issue should be rated by an approved credit rating agency.

• The company should not be in default in any bank loan.

• All expenses (i.e., dealers’ fees, rating agency fee, etc.) for issue of CP are to be borne by the issuing company.

THANK YOU !!!