The deposits that are raised by organizations directly from the public are known as public deposits. Rates of interest offered on public deposits are usually higher than that offered on bank deposits. Public deposits refer to the unsecured deposits invited by companies from the public mainly to finance working capital needs.
Any person who is interested in depositing money in an organization can do so by filling up a prescribed form. The organization in return issues a deposit receipt as acknowledgment of the debt. Public deposits can take care of both medium and short-term financial requirements of a business. The deposits are beneficial to both the depositor as well as to the organization.
Companies generally invite public deposits for a period upto three years.
The merits of public deposits are:
- The procedure of obtaining deposits is simple and does not contain restrictive conditions as are generally there in a loan agreement;
- Cost of public deposits is generally lower than the cost of borrowings from banks and financial institutions;
- Public deposits do not usually create any charge on the assets of the company. The assets can be used as security for raising loans from other sources;
- As the depositors do not have voting rights, the control of the company is not diluted.
The major limitation of public deposits are as follows:
- New companies generally find it difficult to raise funds through public deposits;
- It is an unreliable source of finance as the public may not respond when the company needs money;
- Collection of public deposits may prove difficult, particularly when the size of deposits required is large.