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TREND ANALYSIS OFCERTIFICATE OF

DEPOSITS

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CERTIFICATE OF DEPOSITS

Issued by Scheduled commercial banks (except RRBs) and all

Indian Financial Institutions

Banks have to maintain the appropriate reserve requirement

i.e. CRR and SLRMinimum amount should be Rs.1lakh and in the multiples of

Rs.1Lakh

CDs can be issued to individuals, corporations, companies

NRI subscribe to CDs on non repatriable basis

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Maturity period of CDs issued by Banks is minimum 7 days and

maximum 1 year in case if FIs minimum period is 1 year ans maximum

is 3 years

CDs issued at a discount on face values

Easily Transferable

Banks/ FIs cannot grant loans against CDs,and they cannot buyback

their own CDs before matuarity

CDs can be issued in demat form as well as certificates in physical

form

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PAYMENT OF CERTIFICATE

Physical certificate should be presented for payment by the last holder

Banks can make payment through crossed cheque

Holder of dematted CDs will approach their respective depository

participants

ISSUE OF DUPLICATE CERTIFICATE

A notice is required to be given in local newspaper

Lapse of a reasonable period (15 days) from the day of the notice and

execution of an indemnity bond

Duplicate certificate should be issued in physical form

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How CDs work ?

Buying a CD

CDs typically require a minimum deposit, and may offer higher rates

for larger deposits..

ACD consist simply of a book entry and an item shown in the

consumer's periodic bank statements; that is, there is usually no

"certificate" assuch.

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Interest Payout

At most institutions, the CD purchaser can arrange to

have the interest periodically mailed as a check ortransferred into a checking orsavings account.

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Closing a CDWithdrawals before maturity are usually subject to a

substantial penalty. For a five-yearCD, this is often the

loss ofsix months' interest.

These penalties ensure that it is generally not in a

holder's best interest to withdraw the money before

maturity

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Ladders

Whilelongerinvestmentterms yieldhigherinterestrates,longerterms

alsomay resultinalossofopportunity tolockinhigherinterestrates

inarising-rateeconomy.

Intheladderstrategies,theinvestordistributesthedepositsoveraperiodofseveral years withthegoalofhavingallone'smoney

depositedatthelongestterm (andthereforethehigherrate),butina

way thatpartofitmaturesannually.

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Terms and conditions Therearemany variationsinthetermsandconditionsforCDs

The CD may becallable. Thetermsmay statethatthebankorcreditunioncan

closethe CDbeforethetermends.

Paymentofinterest. Interestmaybepaidoutasitisaccruedoritmay

accumulateinthe CD.

Interestcalculation. The CD may startearninginterestfromthedateofdepositorfromthestartofthenextmonthorquarter.

Righttodelay withdrawals. Institutionsgenerally havetherighttodelay

withdrawalsforaspecifiedperiodtostopabankrun.

Penalty forearly withdrawal. May bemeasuredinmonthsofinterest,may be

calculatedtobeequaltotheinstitution'scurrentcostofreplacingthemoney,

ormay useanotherformula. May ormay notreducetheprincipalforexample,ifprincipalis withdrawnthreemonthsafteropeninga CD withasix-

monthpenalty.

Fees. A feemay bespecifiedforwithdrawalorclosureorforprovidinga

certifiedcheck

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TypesofCertificateofdeposits

1.The Traditional CD-

With a traditional CD, you deposit a fixed amount of money for a certain timeperiod and, in return, you receive a pre-set interest rate. At the end of the timeperiod, or term, you can either cash out the CD or roll it over for another term

2.The Bump-up CD-This allows you to take advantage of rising rates.

3. The Liquid CD-

The liquid CD offers consumers the opportunity to withdraw money fromthe CD without penalties. There may be minimum balance requirements onthe account. The interest rate will usually be higher than the rate on amoney market rate, but less than a traditional CD of the same term andminimum.

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4. The Zero-coupon CD-

The zero-coupon CD works the same way as a zero-coupon bond, there

are no interest payments. You buy the CD at a deep discount to the parvalue - the amount you receive when the CD matures.

5. Callable CDs-If a CD is issued on a callable basis, the bank has theauthority to "call" on it after the pre-set call-protection expires, butbefore the actual CD maturity date .

6. Brokerage CDs-Brokerage CDs are sold through a brokerage. Banksoften use brokers as sales representatives to locate investors who want topurchase CDs. Brokered CDs are more competitive and will often payhigher rates than CDs from your local bank. These CDs can be tradedlike bonds on the secondary market,

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0011 0010 1010 1101 0001 0100 1011Why does Banksissue CD? CDsareissuedby banksduringperiodof

tightliquidty .Banksresorttothissource

whendepositgrowthissluggishbutcredit

demandishigh

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Why doesinvestorgoforCD.

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Differencebetween Savingaccount

and CDs Unlikeasavingsaccount,certificateofdepositaccounts

aresecureinvestments,especially whencomparedtoothersavingsoptionslikemutualfunds,stocks,andotherprivate

equity investments.

Becauseofthis easy access- LIQUIDITY interestratesonsavingsarelowercomparedto CD.

Thedifferencebetweena CD andregularsavingsaccountisthatthemoney ina CD cannotbe withdrawnuntilafterthetermonthe CD isover.Ifdonepenalty willbecharged

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0011 0010 1010 1101 0001 0100 1011AdvantagesofCDs Liquidity

Low minimuminvestment

Flexibility ofReinvestment

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0011 0010 1010 1101 0001 0100 1011Disadvantages Early withdrawlpenalty

Taxesonincome

Longlockinperiod

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Analysisoftrend

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Sizeofthe CD marketYEAR TOTAL OUTSTANDING

(RS IN CRORE)

INTEREST RATE

IN PERCENT

JULY 1991 4846 9-17

1991-92 5682 15-16

1992-93 9803 12.5-16.5

1993-94 5571 7-12.2

1994-95 8017 10-15

1995-96 16316 12-22.3

1996-97 12134 7-14.3

1997-98 14296 7.2-26

1998-99 3717 8-12.5

1999-2000 1227 7.5-12

2000-01 771 6.5-122001-02 1576 5.0-11

2002-03 908 5-1.10

2003-04 4764 3.87-5.16

2004-05 12078 4.21-6.34

2005-06 43568 6.50-8.94

Sep 12 2006 66340 4.60-8.50

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0

10000

20000

30000

40000

50000

60000

70000

TOTAL OUTSTANDING (RS IN CRORE)

Jul-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-2000

2000-01

2001-02

2002-032003-04

2004-05

2005-06

Sep 12 2006

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Thesizeofmoney mobilizedby bankstill

1997-98 throughcertificatesofdeposit

increasedindicatingthattheprimary market

fortheissuanceofthedepositsgrew

rapidly. Stringentcondition inthemoney

marketandfirmcallmoney ratesrekindledtheinterestofbanksin CDsin 1994-95 to

1997-98.

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Since 1998-99,thebanksrelianceonthe

relatively high-cost CDsdeclineddueto

downwardtrend intheratesofothermoneymarketinstrumentsandstronggrowthinbank

depositscoupled withadecelerationinnonfood

bankcredit. Moreover,interestratederegulationin

termdepositsandreductioninmaturity periodto15 days facilitatedbettermanagementofliabilities

bybanksandreducedtheirneedtoissue CDs.

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However,there wasasurgein Cdsissuesin2003-04 onaccountofreductioninthe

stampduty on Cds, withdrawlofthefacilityofprematureclosureofdepositsinrespectofCDsandexemptionofinvestmentin Cds

by banksfromtheinstructionsonnon-SLR

investmentbelow one year. Thesedevelopmentsledtogreaterdemandforinvestmentin CDsby mutualfunds

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Since2004-05 ,thedemandforinvestmentin CDswasfurtherpushedby privatesectorbanksastheyarecostattractivevis-a-vis fixed

deposit.moreover,ascomparedtofixeddeposits,CDsdonotcarryprepayment orprematureclosureandtaxdeductedatsourse(TDS) .also,thereductionintheminimummaturityperiodfrom 15 daysto 7 days made CDsanattractiveinvestmentavenueforbothprivatesectorbanksandmutualfunds. TheoutstandingCDsconstitutrd 4% oftheaggregatedeposits ofissuingbanksasatend march 2006

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0011 0010 1010 1101 0001 0100 1011conclusion CDsofcommercialbanksformonly 2% oftheir

aggregatedeposits.Hencethereislargescopeof

thedevelopmentofthisinstrument. Followingfactorshoweverlimitthegrowthof

CDs

insecondary marketlimitedparticipant,high

interestrate,unlistingofCDs.becauseofhigherinterestrateon CDspeopleprefer

toholdittillmaturity.

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Nofacility ofloansagainstthedeposits by

banksnorbankcanbuy themback.

Minimumlevelofinvestmentisstillhigh

Stampduty.

Fixedrateofdiscountshouldbereplacedby

floatingrate.

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