Lease Finance and Public Deposits

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Conceptual Clarity

The term ‘rent’ and ‘lease’, is very common nowadays. This is the agreement between two parties where one party takes the possession of the property and the other party rents. Landlords and tenants sign the leasing agreements and rent the property. This concept of leasing is taken by the corporate houses as well. This leasing in business is indeed a good source of finance. 

Public Deposits are those deposits that are raised by the organizations directly from the public. The rates are generally high compared to the bank deposits. While a con of public deposit is, it carries a high risk.

We will strengthen our knowledge in these two topics – Lease Finance and Public Deposits in the further sections. 

What is Lease Financing?

A lease is a type of contractual agreement that is transacted between the lessor and a lessee. The owner who is the lessor, he grants the other party who is the lessee the right to use the asset for a specific time period, in return for a periodic payment.  

In the lease contract, clearly the lease arrangement is mentioned. The asset is returned to the lessor at the end of the contractual period. Leasing is common in the acquisition of computers, electronic equipment which become out of date rapidly for the development of technology. 

Merits and Limitation of Lease Financing

The Merits of Lease Financing are Mentioned as below:

  • Lease rents paid by the lessee are not non-taxable income. 

  • Leasing helps in easy finance without totally diluting the ownership of the asset.

  • This also helps the lessee to acquire the asset with a much lower price. 

  • Less documentation is required.

  • The lesser generally carries the risk of obsolescence, this allows flexibility to the lessee to change and replace the asset. 

  • The lease agreement does not affect the debt rising chance. 

The Limitations are as follows:

  • This results in high payout duty, if the asset is not useful and the lessee opts out for premature termination from the contract. 

  • The financial activities of the business will be affected in case the lease is not renewed. 

  • The lease agreement is prone to certain restrictions on the use of assets. Like, this might not allow the lessee to make modification in his own asset. 

  • The lessee actually never becomes the owner of the asset.  

What is Public Deposit?

The deposits raised by the organizations directly from the public is called public deposits. The companies work by offering higher rates of interest that are offered on these public deposits which are usually more than what is offered on the bank deposits. Any person who is willing to deposit their money in an organization does so by filling up a form of the particular organization. The organization in return issues this deposit as receipt with an acknowledgement of the debt. Public deposits take care of both the medium and short-term financial requirements of the business.

As the depositors receive more interest rate than the bank rate, the cost of deposits to the company becomes less than the cost of borrowings from the banks. The deposits are hence profitable to both the depositor as well as to the organization who is in-charge of these deposits. Companies invite public deposits for a maximum period up to three years. The accepting of these of public deposits is regulated and the rules are prescribed by the Reserve Bank of India.

Merits and Limitation of Public Deposits

The merits of public deposits are as follows:

  • Public deposits do not create any charge on the assets of the company, rather the assets can be used as security for raising loans.

  • The depositors do not have any voting rights thus, the control of the company is not diluted.

  • The procedure of depositing in the company is less complicated and barely contains other restrictive conditions.

  • The cost of public deposits is much lower than the cost of borrowings from the banks and other financial institutions.

The Limitations are:

  • Growing companies find it difficult to attract the public and obtain funds through the public deposit system.

  • It is not a reliable source of finance as the public may not respond when the company needs the money.

  • Collection of these deposits seem to be difficult, especially when the deposits required are quite large.

FAQ (Frequently Asked Questions)

1. What are Bank Deposits?

Ans. A deposit account is actually a bank account, which is maintained by a financial institution, where a customer can deposit or withdraw the money. Deposit accounts can be savings accounts, current accounts or any of the several other types of accounts.

Bank deposits includes those money which is placed into banking institutions for the purpose of safekeeping. These deposits are made to deposit accounts like savings accounts, checking accounts and other money market accounts.

2. Who is a Lessor and Who is a Lessee?

Ans. A lessor is the owner of an asset which is being leased, or is rented, to another party, known as the lessee. Lessors and lessees enter into a legal contract, which is known as the lease agreement, that pronounces out the terms of their arrangement.

3. What is the main Function of the Reserve Bank of India?

Ans. The main function of the Reserve Bank of India as enunciated in the Preamble to the RBI Act, 1934 is: “to regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country.”

4. Which Deposits are directly raised from the Public?

Ans. The public deposits are directly raised from the public.