Question

What are Public Deposits? Briefly explain any two merits of Public Deposits.

Answer 1

Public deposits refer to the unsecured deposits invited by companies from the public mainly to finance working capital needs. A company can invite public deposits for a period of six months to three years. Therefore, public deposits are primarily a source of short-term finance. However, the deposits can be renewed from time-to-time. Renewal facility enables companies to use public deposits as medium-term finance.
Merits of public deposits are :

1. Simplicity: Public deposits are a very convenient source of business finance. The company raising deposits has to simply give an advertisement and issue a receipt to each depositor.

2. Economical: 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.