What is the advantage and disadvantage of public deposit?

Answer 1

MERITS OF PUBLIC DEPOSITS:

1.SIMPLICITY: Public deposits are a very convenient source of Business Finance. No cumbersome legal formalities are involved. The company raising deposits has to simply give an advertisement and issue a receipt to each depositor.

2. Economy: Interest paid on public deposits is lower than that paid on debentures and bank loans. Moreover, no underwriting commission, brokerage, etc, has to be paid. Interest paid on public deposits is tax deductible which reduces tax liability. Therefore, public deposits are a cheaper source of finance.

3. No change on assets: Public deposits are unsecured and, therefore, do not create any charge or mortgage on the company's assets. The company can raise loans in future against the security of its assets.

4. Flexibility: Public deposits can be raised during the season to buy raw materials in bulk and for other short-term needs. They can be returned when the need is over. Therefore, public deposits introduce flexibility in the company's financial structure.

5. Trading on equity:Interest on public deposits is paid at a fixed rate. This enables a company to declare higher rates of dividend to equity share holders during periods of good earnings.

6. No dilution of control:There is no dilution of share holders control because the depositors have no voting rights.

7. Wide contacts: Public deposits enable a company to build up contacts with a wider public. These contacts prove helpful in the sale of shares and debenture in future.

DEMERITS OF PUBLIC DEPOSITS:

1. Uncertanity:Public deposits are an uncertain and unreliable source of finance. The depositors may not respond when the company needs funds. Moreover they may withdraw their deposits whenever they feel shaky about the financial health of the company. If a large number of depositors simultaneously withdraw their deposits, the company may find it difficult to repay a huge sum at once. Therefore, public deposits are described as 'fair weather friends'.

2. Limited funds: A limited amount of funds can be raised through public deposits due to legal restrictions and procedural difficulties.

3. Temporary finance: The maturity period of public deposits is short. The company cannot depend upon public deposits for meeting long term financial needs.

4. Speculation: As public deposits can be raised easily and quickly, a company may be tempted to rise more funds than it can profitable use. It may keep idle money to meet future contingencies. The management of the company may indulge in over-trading and speculation which exercise harmful effects on the business.

5. Hindrance to growth of capital market:Public deposits hamper the growth of a healthy capital market in the country. Widespread use of public deposits creates a shortage of industrial securities.

6. Limited appeal: Public deposits do not appeal as a mode of investment to bold investors who want capital gains. Conservative investors may also not like these deposits in the absence of proper security.

7. Unsuitable for new concerns: New companies lacking in sound credit-standing cannot depend upon public deposits. Investors do not deposit money with such companies.