Public Deposits: Advantages and Disadvantages
What is Public Deposits?
Public deposits are deposits collected directly from the public by organisations. Interest rates on public deposits are typically higher than those on bank deposits. Anyone who is interested in making a monetary contribution to an organisation may do so by completing a prescribed form. In exchange, the organisation issues a deposit receipt as proof of debt. A business’s medium and short-term financial needs can be met by public deposits.
Deposits are advantageous to both the depositor and the organisation. While depositors receive higher interest rates than banks, the cost of deposits to the company is lower than the cost of borrowing from banks. Companies invite additional public deposits for up to three years. The Reserve Bank of India regulates the acceptance of public deposits. Public deposits are an important source of financing for a company’s short-term requirements. Companies typically receive public deposits for terms ranging from 6 to 36 months. The deposit of small amounts of savings by the public with industrial and business institutions for a specified period at specified rates of interest in order to earn profits is referred to as public deposit.
Advantages of Public Deposits
The advantages of Public Deposits are as follows:
1. Simple Procedures: The procedure for obtaining deposits is simple and does not include any restrictive conditions that are normally found in a loan agreement.
2. Cost-Effective: The cost of public deposits is generally lower than the cost of borrowing from banks and financial institutions. Obtaining public deposits is very cost-effective. Companies do not need to spend money on prospectus and underwriter commissions. The interest paid on public deposits is lower than the interest paid on other borrowed funds.
3. No Charge on Assets: Public deposits do not usually impose a charge on the company’s assets. The assets can be used as collateral for obtaining loans from other sources.
4. Control: The company’s control is not diluted, as depositors have no voting rights.
5. Boosts creditworthiness: Public deposits are unsafe. The company’s assets can be used as a mortgage in the future. This boosts the company’s creditworthiness.
6. Few Legal Requirements: There are fewer legal requirements for issuing and obtaining funds from public deposits. Companies do not require permission from the controller of capital and are not required to be listed on any stock exchange market, as is the case with shares and debentures.
Disadvantages of Public Deposits
The disadvantages of Public Deposits are as follows:
1. Difficult for New Companies: It is generally difficult for new businesses to raise funds through public deposits.
2. Unreliable Source: It is an unreliable source of finance because the public may not respond when the company requires funds. Deposits may not respond in a capital market collapse. Furthermore, the company’s deposits are volatile.
3. Difficulty in Collection: Collecting public deposits may be difficult, especially if the deposits required are large.
4. Limited Amount: Due to legal constraints, the amount of money that can be raised through public deposits is limited. The amount of public deposits cannot exceed 25% of the share capital and free reserves.
5. Not Ideal for Long-term Financing: A company cannot depend on public deposits for long-term financing because their maturity period ranges from six months to three years.
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