Question

Describe the disadvantages of public deposits.

Answer 1

1. Uncertainty: 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 raise more funds than it can profitably 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. The 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 like to deposit money with such companies.