The Deposit Insurance and Credit Guarantee Corporation (DICGC) has rejected a request made by banks to exempt certificates of deposit (CDs) from deposit insurance coverage.

The Deposit Insurance and Credit Guarantee Corporation (DICGC) has rejected a request made by banks to exempt certificates of deposit (CDs) from deposit insurance coverage.

Subject : Economy

Details:

• Banks pay an insurance premium of 12 paise per Rs 100 of deposit, including CD and Deposit insurance premium payment leads to outgo of funds.
• The DICGC Act does not allow for differentiation between various classes of depositors— institutional and non-institutional.
• DICGC cover is only available for deposits up to Rs 5 lakh. But CDs are issued by banks in lot size of Rs 25 crore/ Rs 50 crore/ Rs 100 crore, etc

Certificate of Deposit (CD)

• It is a negotiable, unsecured money market instrument issued by a bank as a Usance Promissory Note against funds deposited at the bank for a maturity period upto one year.
  • The PN can be Demand Promissory Note or Usance Promissory Note.
  • Demand Promissory Note has to be paid immediately on demand and Usance Promissory Note has to be paid after a certain time period.
• Certificate of Deposits (CDs) may be issued by:
  • Scheduled Commercial Banks;
  • Regional Rural Banks; and
  • Small Finance Banks.
• CDs may be issued to all persons resident in India and usually issued to institutional investors.
• General guidelines
  • In Primary market–CDs shall be issued only in dematerialised form and held with a depository registered with Securities and Exchange Board of India.
  • CDs shall be issued in minimum denomination of ₹5 lakh and in multiples of ₹5 lakh thereafter.
  • The tenor of a CD at issuance shall not be less than seven days and shall not exceed one year.
  • CDs may be issued at a discount to the face value.
  • CDs may also be issued on a fixed / floating rate basis, in case of floating rate it is linked to a benchmark published by a Financial Benchmark Administrator or approved by the Fixed Income Money Market and Derivatives Association of India (FIMMDA) for this purpose.
  • In Secondary market CDs shall be traded either in Over-the-Counter (OTC) markets, including on Electronic Trading Platforms, or on recognised stock exchanges with the approval of the Reserve Bank.
  • Banks are not allowed to grant loans against CDs, unless specifically permitted by the Reserve Bank.
  • Issuing banks are permitted to buy back CDs before maturity. 

Deposit Insurance and Credit Guarantee Corporation:

• It came into existence in 1978 after the merger of Deposit Insurance Corporation (DIC) and Credit Guarantee Corporation of India Ltd. (CGCI)  under the Deposit Insurance and Credit Guarantee Corporation Act, 1961.
• It serves as a deposit insurance and credit guarantee for banks in India.
• It is a fully owned subsidiary of and is governed by the RBI.