Public Deposits: Meaning, Concept, Features, Advantages, Disadvantages & Example
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Meaning and Concept
Public deposits refer to the funds raised by companies directly from the public for a fixed period of time, usually at an interest rate higher than what is offered by banks on savings accounts but lower than market borrowings.
It is a method of financing in which companies invite the general public to deposit money with them, often by issuing an advertisement in newspapers.
This system is mainly used by non-banking companies, finance companies, and sometimes manufacturing concerns to meet short-term and medium-term financial requirements.
Public deposits are regulated under the Companies Act, 2013 and the Companies (Acceptance of Deposits) Rules, 2014 in India.
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Nature of Public Deposits
1. They are unsecured borrowings (no collateral is given).
2. They are raised for a fixed term (usually 6 months to 3 years).
3. They carry a fixed rate of interest, which is higher than bank deposits.
4. They are meant for short to medium-term financing.
5. They are governed by government rules and require transparency in acceptance.
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Characteristics / Features
1. Source of Finance – Public deposits provide companies with an alternative source of short and medium-term finance.
2. Unsecured in Nature – No assets are pledged against these deposits.
3. Fixed Interest – A certain rate of interest is promised, higher than bank deposits.
4. Specified Period – Deposits are taken for a definite time, often between 1–3 years.
5. Regulated by Law – Companies must follow rules set by the Ministry of Corporate Affairs (MCA).
6. Flexibility – Deposits can be renewed or withdrawn at maturity.
7. Risk for Depositors – Since unsecured, depositors face some risk if the company fails.
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Advantages of Public Deposits
For Companies
1. Simple & Convenient – Easy to raise without pledging assets.
2. Lower Cost – Generally cheaper than bank loans or issuing debentures.
3. Flexibility – Can be used as per company’s requirements for working capital.
4. Retention of Control – Does not dilute ownership like issuing shares.
5. Public Confidence – Attracts trust if a reputed company raises deposits.
For Public (Depositors)
1. Higher Interest – Better returns compared to savings or fixed deposits in banks.
2. Safe with Trusted Companies – Reputed companies pay timely interest and repayment.
3. Shorter Lock-in Period – Flexibility of tenure compared to long-term investments.
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Disadvantages of Public Deposits
For Companies
1. Limited Period – Cannot be raised for long-term financing.
2. Uncertainty – Depositors may not renew deposits, creating a shortage of funds.
3. Legal Restrictions – Companies cannot exceed certain limits for public deposits.
4. Reputation Sensitive – Only well-known companies attract deposits; small firms struggle.
For Public (Depositors)
1. Unsecured – Higher risk of default compared to bank deposits.
2. Lack of Liquidity – Money is locked till maturity.
3. No Government Guarantee – Unlike banks, deposits are not insured.
4. Company Performance Dependent – If the company suffers losses, repayment may be delayed.
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Example
Suppose ABC Finance Ltd., a non-banking financial company (NBFC), needs ₹50 crore for working capital. Instead of taking a costly bank loan, it issues an advertisement inviting public deposits at an interest rate of 9% per annum for 2 years.
If 10,000 individuals invest ₹5 lakh each, the company successfully raises the funds.
At maturity, the company pays back the principal plus interest to the depositors.
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Life Example (Real-World)
Many Indian NBFCs like Bajaj Finance, Mahindra Finance, and Shriram Transport Finance regularly invite public deposits with attractive interest rates ranging from 7%–9%.
Retired individuals often invest in these deposits to earn higher fixed returns compared to banks.
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✅ In summary: Public deposits are unsecured borrowings from the public that provide companies with short-term finance and give depositors higher returns, but they carry risk since they depend on the company’s repayment ability.
