Regulation of Bank Finance^383
monitor closely the performance and efficiency of the borrower.
Public Deposits
Many firms, large and small, have solicited unsecured deposits from the public in recent
years, mainly to finance their working capital requirements.
Cost
The interest rate payable on public deposits was subject to a ceiling of till mid-1996.
Just before the ceiling was withdrawn, it was 15 per cent. When the ceiling was
withdrawn in 1996, companies started offering higher returns. Some of the NBFCs
offered about 20 per cent. Due to unhealthy competition, RBI has re-imposed the
ceiling of 15 per cent.
Regulation
The Companies (Acceptance of Deposits) Amendment Rules 1978 governs fixed
deposits. The important features of this regulation are:
l Public deposits cannot exceed 25 per cent of share capital and free reserves.
l The maximum maturity period permitted for public deposits is 6 months and the
maximum maturity period allowed is 3 years. For non-banking financial
corporations (NBFCs) however, the maximum maturity period is 5 years. A
minimum maturity period of 3 months, however, is allowed for deposits amounting
to 10 per cent of share capital and free reserves.
l A company which has public deposits is required to set aside, as deposit or
investment, by 30th April of each year, an amount equal to 10 per cent of the
deposits maturing by 31st March of the following year. The amount so set
aside can be used only for repaying such deposits.
l A company inviting deposits from the public is required to disclose certain
facts about its financial performance and position.
Evaluation
Public deposits offer the following advantages to the company:
l The procedure for obtaining public deposits is fairly simple.
l No restrictive covenants are involved.
l No security is offered against public deposits. Hence the mortgageable assets
of the firm are conserved.
l The post-tax cost is fairly reasonable.
The demerits of public deposits are:
l The quantum of funds that can be raised by way of public deposits is limited.