The Banker Certificate: An Introduction and the possible uses of the instrument

Posted in Finance Articles, Total Reads: 2447 , Published on 17 June 2014

Money had evolved over the ages, from the paper system, introduced by Kublai Khan to the coin system that Sher Shah Suri had introduced in India, to the present day monetary systems and financial instruments or securities that stand for the inherent money value. Most of these financial instruments have a singular utility that is they stand for the money value of the instrument at that point of time and some of these instruments are used in transactions or as investment instruments. But then, innovations in financial instruments have led to some instruments which are quite unique. An example, that holds relevance are the financial derivatives which do not have any particular financial value of their own, but derive their worth on the price change of the underlying asset.

image: Idea go,

This study dwells into the aspects of a new financial instrument, termed as Banker Certificate and puts it up for deliberation as a first of its kind unique instrument. Banker Certificate is an attempt at financial engineering and innovation, by the author, that which could be used as money’s equivalent, in commercials transactions while the original investment is at the bank and continues to provide interest to the investor, for a particular period of time and for which time the Banker’s Certificate issued to the investor could be used by the investor to transact and which could change hands and be in circulation as a money equivalent, till such time it is valid and on the expiry of the term, stated on the face of the instrument, would be converted into cash in the account of the bearer of the Banker Certificate and the processing charges would be charged from the interest of that of the original investor who was issued the Banker Certificate instrument. The unique characteristic of this instrument would be that some of the money that is deposited in a bank would find dual utility, that which is used by the banker for investment, loans providing and other purposes and on the other side that which is used by the investor to transact or reinvest, thus almost doubling the potency of the money.

Issuing the Banker Certificate:

The Banker Certificate could be issued by only reputed banks. There could be a list of such banks which are allowed to issue. It starts with an xyz person investing some money as a deposit. A clause could be provided to the depositor to specify if a part of it could be locked for a period, may it be six months or a year and then the depositor could get an option for the issue of a Banker Certificate on the locked-in amount. Now the volume of Banker Certificates issued would be subject to the regulating body or the laws pertaining to the government of the country where they are issued. The Banker Certificate could be issued on some portion of the actual deposit which may be fifty percent or sixty percent of the actual deposit. That amount of money on which the Banker Certificate is issued stays locked in with the bank as a fixed deposit and earns interest for the depositor. The Banker Certificate thus issued by the banker to the depositor could be used by the depositor to transact as if the holder of the instrument had that much money on which a Banker Certificate is issued, i.e. in the buying of property or paying a loan or setting up a business etc. At the end of the validity period of the Banker Certificate, the bearer of the certificate could lay a claim for the money by a simple process and the amount gets deposited in the account of the bearer of the Banker Certificate, while the original depositor is charged for the processing i.e. a portion of the interest amount of the money, intended for the original depositor gets deducted as bank processing charges. In the period, from its issue to its dissolution, it could change hands without constraints. The Banker Certificate would essentially have a unique identity number or alphanumeric code and each transaction of it is recorded online to track its traversal, which could also protect the original depositor as well as the consequent bearers of the instrument as also offset any fake Banker Certificates from transactions.      

The dissolution of the Banker Certificate:

The Banker Certificate gets naturally dissolved when its mentioned validity period expires or when the issuing bank needs to call for a premature dissolution of the validity period of the instrument due to its internal economic pressures or due to the governmental or regulating body pressures. A brief notice period could be given to the depositor as well as to the bearer of the instrument, as it could be tracked by its unique ID. Once it is dissolved the data on its traversal could be removed and only the data on whom it was issued and the cash transferred to the last bearer of the instrument, who had redeemed it, could be retained by the bank. This could be subjected to the regulations and the requirements of the domicile.   

Who can issue and the cautions:

The Banker Certificate could be issued only by specific banks, the qualification could be based on the audit report of the bank, its performance over a period of a decade or some timeframe, its net worth and its NPA position, the essential criteria of that could be based on specific regulations framed by the regulatory body that governs the bank.

Caution need to be taken on the extent of the money that is in circulation by Banker Certificates as the buying potential of the underlying money gets doubled with the issue of these instruments.

Money devaluation control using Banker Certificate:

Fresh money in any stipulated denominations or form, once out of the mint, is almost impossible to destroy and thus money that is put into circulation as it is out of the mints change hands and any external control or pressures applied only superficially could control the extra liquidity thus induced. There may be quite a few reasons that could inevitably lead to the new issue of currency but once the crisis is over, in the aftermath of it there could be a new challenge to maintain the economy in the newer circumstances along with the problem of added liquidity, which may tend to devaluate the money and even could bring with it some extra quantum of inflation pressure. The concept of Banker Certificate could minimize the need to issue newer currency or minimize the volume of new currency issuance to considerable levels, as alternatively the volume of Banker Certificate issues could be enhanced for the stipulated time, maximizing the value of the underlying money to suit the requirements. An analogy could be found in a special weapon produced to safeguard and better the circumstances in a particular environment and then disband it by disassembling it after the crisis or challenge posed had been resolved. For, financial institutions and corporations, that which have the requisite safeguards and qualifications may be directed to get the added money support to their systems by seeking Banker Certificates from their bankers and induce liquidity. The validity time of the Banker Certificate, in this context could be as small as a quarter or even a year, subject to the discretion of economic governing bodies of the region. This negates the problem of dealing with problem of fresh issuance of currency and placing controls to minimize devaluation as the Banker Certificate could be dissolved immediately after the period of crisis is over.     

Inflation management using Banker certificate:    

Fresh currency issued or liquidity induced by lowering bank lending rates and encouraging spending is the most oft followed procedure to kick start a staggering economy, along with procuring funds from the foreign investments and monetary loans from global financial institutions, the IMF and the World Bank. This could boost consumerism and get the economy rolling but then bank rates lowered, beyond the banker’s comfort zone, may make the banking system a little weaker economically as its profitability is lower and also a depletion of its assets could be visible in that time period as incoming deposits could be lower as the bank would be paying lower interest rates to the depositors.

The Banker Certificates lessens the need to lower bank rates to fight a stagnant-directed economy as instead a bank could issue more volumes of Banker Certificates to the customers to spend while providing the same rates of interest on their deposits. The government could facilitate this process by directing the banks to issue Banker Certificates in the volume that is economically required and could even direct them on the time period. The generic demand pull, when it happens, due to a growth in the economy could find more volumes of Banker Certificates and a reduction or stopping or immediate dissolution of the Banker Certificates when there is lesser demand. In this way the bank rates are more stable but the purchasing power of the consumers could be managed to suit the specific economic conditions. The inflationary pressures could be handled better with the Banker Certificate, while the bank rates attain greater stability.

The Last Word:

The Banker Certificates have the ability to keep the economic activity up to the required levels as it positively effects the economic cycle, with the enhancement of buying potential to the actual buying to the development of demand and the consequent expenditure on money, material and processes by the producers or by the service providers, but subject to proper use and with certain amount of discretion and the requisite tailor-made precautionary measures that should essentially follow some broader guidelines from a globally acceptable governing body, to build confidence and make use of it in controlled manner as a financial instrument of the future.

About the author:

This article has been authored by Suresh Kumar Tamada.The author is a management faculty teaching various subjects on management, especially those pertaining to the finance specialization. The author also authored papers for three international journals. An National Stock Exchange Certified Market Professional (NCMP Level – 1), the author closely monitors the market trends. Also, had authored six books in the fiction category.         


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