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Commercial Paper vs Certificate of Deposit: Issuers, Tenors & RBI Norms

In the wholesale financial market, Commercial Paper and Certificates of Deposit serve as primary short-term debt instruments. Both instruments were introduced following recommendations of the Working Group on the Money Market chaired by N. Vaghul in 1987. Certificates of Deposit were introduced in 1989 to assist commercial banks in mobilizing bulk deposits during periods of tight liquidity. Commercial Paper followed in January 1990, providing highly rated corporate borrowers with a market-based channel to raise working capital outside traditional bank loans. The Reserve Bank of India regulates both instruments under Section 45W of the Reserve Bank of India Act, 1934. These instruments deepened the domestic money market and provided transparent market-based benchmarks for short-term corporate interest rates.

The primary distinction between the two instruments lies in the issuing entity and legal structure. Commercial Paper is an unsecured promissory note issued by corporates, primary dealers, and all-India financial institutions. Eligible corporate issuers must have a tangible net worth of at least four crore rupees and sanctioned working capital limits from commercial banks. In contrast, a Certificate of Deposit is a negotiable, dematerialized promissory note issued exclusively by Scheduled Commercial Banks and select financial institutions. Both instruments are issued at a discount to face value and redeemed at par. Commercial Paper carries credit risk tied to the corporate issuer, requiring a mandatory credit rating of A2 or higher. Certificates of Deposit represent direct deposit liabilities of banks, backed by institutional financial strength and banking stability.

Both instruments have short-term maturities spanning between seven days and one year, but their operating rules diverge under RBI guidelines. Commercial Paper is issued in minimum denominations of five lakh rupees and multiples thereof. Certificates of Deposit are also issued in minimum denominations of five lakh rupees following modern RBI harmonizations. Crucially, commercial banks are strictly prohibited from granting loans against Certificates of Deposit to prevent circular financing. In addition, corporate buybacks of Commercial Paper are permitted after a minimum holding period of seven days through primary dealers. Mutual funds, insurance companies, and commercial banks serve as major institutional subscribers. Together, these instruments create fluid liquidity transmission across the financial sector.
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Key Concepts & Self-Assessment20 Key Facts

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  1. #1
    Commercial Paper and Certificates of Deposit were introduced based on the 1987 Vaghul Committee recommendations.
  2. #2
    Certificates of Deposit were introduced in 1989, while Commercial Paper was launched in India in January 1990.
  3. #3
    The Reserve Bank of India regulates both instruments under Section 45W of the Reserve Bank of India Act, 1934.
  4. #4
    Commercial Paper is issued by corporate entities, primary dealers, and all-India financial institutions.
  5. #5
    Certificates of Deposit are issued exclusively by Scheduled Commercial Banks and select financial institutions.
  6. #6
    Commercial Paper is an unsecured promissory note, while a Certificate of Deposit represents a negotiable bank deposit.
  7. #7
    Corporate issuers of Commercial Paper must have a minimum tangible net worth of four crore rupees.
  8. #8
    Commercial Paper issuers must secure a minimum credit rating of A2 from a SEBI-registered rating agency.
  9. #9
    Certificates of Deposit do not require individual credit ratings as they carry the credit backing of the issuing bank.
  10. #10
    Both Commercial Paper and Certificates of Deposit feature a minimum maturity of seven days and a maximum of one year.
  11. #11
    Both instruments are issued in minimum denominations of five lakh rupees and in multiples of five lakh thereafter.
  12. #12
    Both Commercial Paper and Certificates of Deposit are issued at a discount to face value and redeemed at par.
  13. #13
    Commercial banks are strictly prohibited from granting loans against Certificates of Deposit.
  14. #14
    Corporate issuers can execute buybacks of Commercial Paper after a minimum holding period of seven days.
  15. #15
    Both instruments are held and traded primarily in dematerialized form through depository participants.
  16. #16
    Commercial Paper helps corporations lower short-term borrowing costs compared to traditional bank overdrafts.
  17. #17
    Certificates of Deposit help banks manage credit-deposit mismatches and mobilize bulk funds during liquidity crunches.
  18. #18
    Mutual funds are among the largest institutional investors in both Commercial Paper and Certificates of Deposit.
  19. #19
    Secondary market trading in both instruments is reported on the FIMMDA reporting platform.
  20. #20
    These money market instruments provide corporations and banks with market-determined short-term pricing.

Subject Specialist Commentary

Analytical perspective & practical exam advice from the Master10 academic board

Educator's Insight
Commercial Paper and Certificates of Deposit are fundamental pillars of India's money market, enabling efficient short-term liquidity management. While Commercial Paper provides corporate treasuries with cost-effective debt funding, Certificates of Deposit allow banks to mobilize wholesale funding during liquidity strains. Both instruments help bridge temporary cash mismatches across the broader economy.
In competitive examinations, candidates often encounter questions testing issuer profiles, maturities, and regulatory restrictions. Remember that corporate entities issue Commercial Paper, whereas Scheduled Commercial Banks issue Certificates of Deposit. Keep in mind that both instruments have identical maturity boundaries (7 days to 1 year) and minimum denominations (five lakh rupees), but banks cannot lend against Certificates of Deposit. To remember key facts about both instruments, use the mnemonic FUNDS: Five lakh minimum face value, Unsecured corporate promissory note for CP, Negotiable bank deposit receipt for CD, Discount pricing mechanism, and Seven-day to one-year tenor boundaries.

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