Inter-corporate Deposits (ICDs)

Inter-corporate Deposits (ICDs) are an important short-term financing instrument used by companies to manage liquidity and meet working capital requirements. Although they do not involve banks directly as borrowers or lenders, ICDs are closely linked to the broader financial system and influence liquidity conditions, credit flows, and corporate financing patterns in the Indian economy. In banking and finance, ICDs occupy a distinct position as a market-driven, flexible, and relatively informal source of funds for corporates.

Concept and Meaning of Inter-corporate Deposits

Inter-corporate Deposits refer to unsecured short-term deposits placed by one corporate entity with another. These deposits are generally used by companies with surplus funds to earn higher returns compared to traditional bank deposits, while borrowing companies use them to meet temporary funding needs.
ICDs are typically negotiated directly between corporates and are not raised from the public. The maturity period usually ranges from a few days to one year, with most ICDs concentrated in the short-term segment of up to six months. Interest rates on ICDs are market-determined and depend on factors such as creditworthiness of the borrowing company, liquidity conditions, and prevailing interest rates.

Role of ICDs in Corporate Finance

In corporate finance, ICDs serve as a flexible tool for short-term fund management. Companies often face timing mismatches between cash inflows and outflows due to operational cycles, investment schedules, or tax payments. ICDs help bridge these gaps efficiently.
The key roles of ICDs include:

• Providing short-term liquidity to corporates
• Enabling better utilisation of surplus corporate funds
• Offering higher returns to lending companies compared to bank deposits
• Reducing dependence on bank credit for temporary funding needs

By facilitating direct fund transfers between corporates, ICDs enhance financial flexibility and efficiency.

ICDs and the Banking System

Although ICDs are transactions between corporates, they have indirect implications for the banking system. When corporates rely on ICDs instead of bank loans, it can reduce short-term demand for bank credit. Conversely, surplus funds placed as ICDs might otherwise have been parked in bank deposits.
Banks may also be indirectly exposed to ICDs through lending relationships with corporates or through non-banking financial companies that participate in such transactions. Therefore, widespread use of ICDs can influence liquidity conditions and credit dynamics in the banking sector.

Types of Inter-corporate Deposits

ICDs are commonly classified based on maturity and purpose:

• Short-term ICDs: Deposits with maturity up to three months, used for immediate liquidity needs
• Medium-term ICDs: Deposits ranging from three to six months, often used for working capital adjustment
• Longer-term ICDs: Deposits extending up to one year, though less common due to higher risk

Unlike bank deposits, ICDs are generally unsecured and do not enjoy deposit insurance, making credit assessment critical for lending corporates.

Regulatory Framework in India

In India, ICDs are governed primarily by corporate law and financial regulations rather than direct banking regulation. The Reserve Bank of India monitors ICD activity from a systemic perspective, especially where it may affect financial stability or liquidity conditions.
For listed companies, disclosure requirements under securities regulations enhance transparency regarding ICD transactions. Accounting standards require ICDs to be reported in financial statements, enabling investors and regulators to assess exposure and risk.

Risk and Return Characteristics

ICDs typically offer higher interest rates than bank fixed deposits because they are unsecured and involve higher credit risk. The absence of collateral and regulatory protection makes ICDs sensitive to the financial health and reputation of the borrowing company.
Key risks associated with ICDs include:

• Credit risk arising from potential default
• Liquidity risk due to limited secondary market
• Concentration risk if large exposures are taken to a single borrower

To mitigate these risks, lending corporates often rely on internal credit assessment, reputation, and long-standing business relationships.

ICDs and Money Market Linkages

ICDs are part of the broader short-term funding ecosystem and have linkages with the money market. Interest rates on ICDs often move in tandem with money market rates, reflecting overall liquidity conditions in the economy.
During periods of tight liquidity, ICD rates tend to rise as borrowing corporates compete for funds. Conversely, surplus liquidity leads to softer rates and increased availability of ICD funding.

Significance in the Indian Economy

In the Indian economy, ICDs play a supplementary role in corporate financing, particularly for large business groups and well-rated companies. They facilitate efficient allocation of short-term funds within the corporate sector and reduce pressure on the formal banking system.
ICDs also contribute to financial flexibility and resilience by providing an alternative funding channel during periods when bank credit is constrained or costlier. However, excessive reliance on ICDs can increase systemic risk if corporate leverage rises sharply.

Advantages of Inter-corporate Deposits

ICDs offer several advantages, including flexibility in terms, faster execution, and potentially higher returns for lenders. Borrowing companies benefit from quick access to funds without extensive documentation or collateral requirements.
For the financial system, ICDs support efficient liquidity management and diversification of funding sources within the corporate sector.