What are Public Deposits?
Public deposits refer to the funds raised directly by organizations from the general public. Essentially, this mechanism allows people to lend money to organizations, and in return, they receive an interest rate that’s typically higher than what’s provided by banks for regular deposits.
The process involves individuals completing a form and contributing funds to the organization. The organization then issues a deposit receipt, which serves as proof of the debt owed by the organization to the depositor.
Deposits with companies have come into prominence in recent years. Of these, the more important are the deposits accepted by trading and manufacturing companies. The Indian Central Banking Enquiry Committee in 1931 recognized the importance of public deposits in the financing of the cotton textile industry in India in general and in Ahmedabad in particular.
The growth of public deposits has been considerable. From the company’s point of view, public deposits are a major source of finance to meet the working capital needs. Due to the credit squeeze imposed by the Reserve Bank of India on bank loans to the corporate sector during the 1970s -1980s and also due to the recommendations of the Tandom committee, restricting credit, many companies were not getting as much money in the 1980s as they used to get in the past from banks.
So, public deposits came in handy as working capital funds for businesses. While to the depositor, the rate offered is higher than that offered by banks, the cost of deposits to the company is less than the cost of borrowings from banks.
Advantages of Public Deposits
The advantages of public deposits are as follows:
- There is no need to create any charge against any of the assets of the company for raising funds through public deposits.
- The company can get the advantage of trading on equity since the rate of interest and the period for which the public deposits have been accepted are fixed.
- Public deposit is a less costly method for raising short-term as well as medium-term funds required by the companies, because of less restrictive covenants governing this as against bank credits.
- No questions are asked about the uses of public deposits.
- Tax leverage is available as interest on public deposits is a charge on revenue.
Disadvantages of Public Deposits
The main disadvantages of public deposits are as follows:
- This mode of financing, sometimes, puts the company into serious financial difficulties. Even a slight rumor about the inefficiency of the company may result in a rush of public to the company for getting premature payments of the deposits made by them.
- Easy availability of funds encourages lavish spending.
- Public deposits are unsecured deposits and in the event of a failure of the company, depositors have no assurance of getting their money back.