Public Deposits: Meaning, Merits and Demerits | India | Capital | Company

After reading this article you will learn about:- 1. Meaning of Public Deposits 2. Merits or Advantages of Public Deposits 3. Demerits or Disadvantages.

Meaning of Public Deposits:

One of the traditional methods of raising funds in India has been that of receiving public deposits. Before independence, the practice of receiving public deposits was prevalent mainly in cotton textile industries in Bombay, Ahmedabad and Sholapur and gardens of Assam and Bengal.

As the time has been passing with that the companies have been inviting more funds from the public, by way of deposits by offering higher rate of interests than what is normally offered by the bank.

The companies always prefer to accept public deposits for meeting their financial needs, than approaching banks or other financial bodies. Companies generally receive public deposits for different periods ranging from 6 months to 10 years. The rate of interest on the deposits varies from 10 per cent per annum to 15 per cent per annum depending upon the period of deposits and the reputation and standing of the company.

Merits or Advantages of Public Deposits:

Companies can very easily raise money from the banks as well as from other governmental financial institutions, but still these prefer public deposits. A question, therefore, arises as to why public deposits are preferred.

Some of the important causes are:

1. When a company approaches a bank or any other financial institutions, it will have to offer some securities, which is a big botheration. But so far as public borrowing and deposits is concerned, there is no such problem.

2. Usually loans from banks and other financial institutions are available for a short period and after that there will be problem of renewal, with the imposition of new clauses. But in the case of public deposits no question of terms arises. As long as the undertaking goes on paying interest to the party, it will not like to withdraw money.

3. When borrowing is through government financial institutions, many formalities will have to be completed. Sometimes these formalities are both taxing as well as irritating. These are time consuming also. But in the case of public deposits, no formalities are to be completed. The money pours in and accepted to the extent to which the enterprise need it.

4. In many cases, when the companies approach public financial institutions for loans, the rates charged are higher than the rates at which public debts are received by the company. In this way also companies discard loans from banks.

5. In public debt, there is no upper limit. If there is any, that is to be decided by the company itself. Thus fixing of upper limit is not arbitrary. On the other hand, in the case of financial institutions, the government imposes certain limits, which will have to be adhered to and no fund can be sanctioned beyond those limits.

6. The bank or any other financial institutions will like to know the purpose for which funds are needed. It is usually seen that when loans are asked for some adventurous projects, in which risks are involved these are denied. This creates a helpless situation for the company. But in the case of public deposits, the purpose, for which money is being accepted, is never asked for.

7. There are certain purposes for which the company wants to raise loans and which under the government rules cannot be sanctioned by a bank or any other financial undertaking. The company then finds it convenient to raise funds from the public by way of accepting public deposits.

It is on account of these varying reasons that most of the companies always prefer to accept public deposits for meeting their financial needs, than approaching banks or other public financial bodies.

Demerits or Disadvantages of Public Deposits:

Public debts have of course its own advantages and many financial institutions are quite keen to borrow from the public rather than from the government financial houses, but public too has its own limitations.

Some of the important limitations are:

1. Fair-Weather Friends:

Public deposits are termed as fair-weather friends. They are quite uncertain in periods of depression. Depositors may withdraw their funds when they visualise, even on false grounds, the shaking position of the company. It may cause great inconvenience to the companies.

2. Heavy Risk of Depositors:

The depositors pay the money to the firm only on its credit and goodwill. There is neither any backing nor security against the amount advanced. We find that in many cases the firms go in liquidation 01 declare themselves insolvent with the result that the depositors find themselves unable to get back their money.

3. Encourages Speculation:

People who are the in charge of concern with the help of surplus deposits begin to indulge in speculative business. They tempt the management to indulge in overtrading which may endanger the savings of the investors.

4. Effects on Credit Policy:

Public debts very adversely affect the credit policy of Reserve Bank of India. The Reserve Bank of India, in consultation with the Government formulates certain credit policies, which it is felt, will be in the overall interest of the country. But when credit is available through public debts, this credit policy as formulated by the Government or Reserve Bank of India is adversely affected.

5. Difficulty in Repayment:

When companies utilise the deposits to finance their capital expenditure, the money is blocked up and it becomes very difficult for the company to repay it for a long period.