Meaning of Public deposit? Growth and limitation of Public deposit.

Deposits with companies have come into predominance in recent years of the more important deposit accepted by the trading and manufacturing companies such deposits have been a traditional source of finance in India. The Indian Central banking enquiry committee in1931 recognised the importance of public deposits in the financing of cotton textile industry in India in general and at Ahmedabad in particular. More recently, since the 3rd plan, the growth of such deposits has been considered. As a result of general credit stringency, companies attempted to raise funds needed by them directly from the public by offering interest rates on deposit placed with them well in excess of rates for deposit of comparable period paid by banks.

                  While to the depositor the rate offered is higher than that offered by banks , the cost of deposit to the company is less than the cost of borrowing from banks. Moreover the availability of the volume of bank credit are restricted by considerations of margin, security offered, period of statements etc. The credit available to companies through deposit is not hampered by such consideration. There is no question of margin or security. Further those deposits are available for comparitively longer terms then bank credit. This virtually means the companies cut down one set of intermediaries and borrow directly instead through the banks.

          Companies find such deposit very attractive 1st the cost of such deposits is lower than the rate of interest charged by banks, 2ndly they are unsecured, 3 rdly, no questions are asked about their uses and finally deposits are used quite often for purposes for which companies cannot get credit under governments anti inflationary policy. As a matter of fact, the government can be said to have perpetualed the practice by allowing even public sector companies to invite deposits from the public.

Growth:

Several companies including many multinationals which had never tapped this sources earlier, made attractive offer to public depositores. As such depositors have benefited by the scramble for funds by several companies in that they have able to secure higher rates of interest on their deposit.

   Despite the recommendation of the James Raj study group, set up by RBI in 1975, that the ultimate objective should be to discharge further growth of company deposits they have continued to grow. More and more companies are inviting such deposit and offering rates of interest which are much higher than offered by banks on term deposit there has been a combination of several factors leading to part in deposites these factors are rapid rise in prices and the consequent decline in the purchasing power of money, aggressive advertising compaign both by companies and their broker , restricted return on equity shares, convertibility clause acting as a hurdle for companies to borrow from financial institutions etc.