Explain the merits and demerits of public deposits as a source of finance.
Explain the merits and demerits of public deposits as a source of finance.
Public deposits have the following merits and demerits :
Merits :
(a) No Security: Public deposits are unsecured. The assets of the company are free to be used as a mortgage in future. This increase the creditworthiness of the company.
(b) Economical: Obtaining public deposits involves very less cost. Companies don't need to spend on prospectus and underwriter commission. The interest paid on public deposits is less than the interest paid on other borrowed funds.
(c) Simple procedure: There are less legal formalities for issuing and obtaining funds from public deposits. The companies do not take permission from the controller of capital and there is no need to get listed in any stock exchange market as in the case of shares and debenture.
Demerits of public deposits :
(a) Limited amount: The number of funds that can be raised by way of public deposits is limited because of legal restriction. Public deposits can't exceed 25% of share capital and free reserves.
(b) Uncertainty: Public deposits is an uncertain and unreliable source of finance. During depressed market conditions in the capital market, deposits may not respond. Also, deposits of the company are not stable.
(c) Suitable to meet short-term financial needs: A company cannot depend upon public deposits for a long-term financing requirement as the maturity period of public deposits is between six months to three years.
Public deposits have the following merits and demerits :
Merits :
(a) No Security: Public deposits are unsecured. The assets of the company are free to be used as a mortgage in future. This increase the creditworthiness of the company.
(b) Economical: Obtaining public deposits involves very less cost. Companies don't need to spend on prospectus and underwriter commission. The interest paid on public deposits is less than the interest paid on other borrowed funds.
(c) Simple procedure: There are less legal formalities for issuing and obtaining funds from public deposits. The companies do not take permission from the controller of capital and there is no need to get listed in any stock exchange market as in the case of shares and debenture.
Demerits of public deposits :
(a) Limited amount: The number of funds that can be raised by way of public deposits is limited because of legal restriction. Public deposits can't exceed 25% of share capital and free reserves.
(b) Uncertainty: Public deposits is an uncertain and unreliable source of finance. During depressed market conditions in the capital market, deposits may not respond. Also, deposits of the company are not stable.
(c) Suitable to meet short-term financial needs: A company cannot depend upon public deposits for a long-term financing requirement as the maturity period of public deposits is between six months to three years.
