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RBI lowers floor for CD investments

BS Banking Bureau

The Reserve Bank of India has decided to reduce the minimum size of investment by a single investor in certificates of deposit from the existing level of Rs 500,000 to Rs 100,000 and in multiples of Rs 100,000 thereafter. This move aims to activate the otherwise dull market and increase the investor base.

CDs are financial instruments issued by scheduled commercial banks to investors at a discount to the face value and are redeemed at the face value. The instrument was popular with banks when their deposit growth was tardy and they were not allowed to offer preferential interest rates to bulk depositors.

"CDs have become a dull product as banks have now been allowed to offer higher interest rates to bulk depositors. The stamp duty makes CDs costly for the banks to issue this product. There is very little appetite for CDs in the secondary debt market. The RBI might have taken this step to revitalise the market for this product," M G Sanghvi, deputy general manager, Dena Bank.

CDs have a tenor of up to one year and can be transferred by endorsement and delivery. However, the instrument cannot be bought-back by the issuing bank.

"It is a good investment for banks for asset liability management purposes. Interest on CDs depends on the prevailing yields in the government securities market and the call money rates," said a treasurer with a public sector bank.

As per the latest data, the total outstanding CDs issued by scheduled commercial banks was Rs 13.43 billion as on May 3, 2002.

CDs issued by banks in the fortnight ending May 3 were Rs 590 million.

The rate of interest on the CDs ranges between 5.00 to 10.28 per cent depending on the tenor of the instruments.

The Reserve Bank, in April 2002, said that, with effect from June 30, 2002, banks and FIs should issue CDs only in the dematerialised form.

The existing outstandings of CDs shall be converted into the demat form by October 2002.

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