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.
Bankers’ underscored that CDs, which have a tenor of up to one year, are issued in minimum denomination of ₹5 lakh and in multiples of ₹5 lakh thereafter, usually to institutional investors, but DICGC’s deposit insurance cover is only available for deposits up to ₹5 lakh.
Currently, banks pay an insurance premium of 12 paise per ₹100 of deposit, including CD, raised.
Banks’ request to exempt CDs from DICGC coverage comes even as they have augmented funds mop up via CDs since June 2022 due to liquidity tightness in the market. Deposit insurance premium payment leads to outgo of funds.
The outstanding CDs of banks (net of repayments) increased by ₹62,171 crore from ₹1,89,977 crore as on June 03, 2022, to ₹2,52,148 crore as on September 23, 2022, with the rate of interest rising from 4.89-5.89 per cent to 5.81-6.73 per cent during the said period.
DICGC told banks that CDs issued by banks have to be taken into account for paying deposit insurance premium, a senior banker said. Further, 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 ₹5 lakh. But CDs are issued by banks in lot size of ₹25 crore/ ₹50 crore/ ₹100 crore, etc. So, a single entity will be holding ₹10-25 crore. So, the lot size also counts.
“For example, a bank issues ₹100 crore worth of CDs today. The initial investor is, say, Kotak Mutual Fund (MF). They will hold the CDs for a few days and sell it to, say, Axis MF. This MF, in turn, can sell it to, say, SBI and SBI MF,” said a senior banker.
As a result, one will not know the original owner of the CDs unless information is culled out from the beneficiary position statement available with the custodian, he added.
“CDs are reported transactions. So, there is a bit of transparency and you will know at what rate the issuer is raising funds. However, in the case of bulk deposits, a bank can offer up to 8 per cent interest rate, nobody will know. Bulk deposits are not reported,” said RK Gurumurthy, Head-Treasury, Dhanlaxmi Bank.