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(ii) It is an unreliable source of finance as the public may not respond when
the company needs money.
(iii) Collection of public deposits may prove difficult, particularly when the
size of deposits required is large.

Commercial Paper (CP)

 Commercial Paper emerged as a source of short term finance in our
country in the early nineties.
 Commercial paper is an unsecured promissory note issued by a firm to
raise funds for a short period, varying from 90 days to 364 days. It is
issued by one firm to other business firms, insurance companies, pension
funds and banks.
 The amount raised by CP is generally very large. As the debt is totally
unsecured, the firms having good credit rating can issue the CP. Its
regulation comes under the purview of the Reserve Bank of India.

Merits

(I) a commercial paper is sold on an unsecured basis and does not contain
any restrictive conditions;
(II) As it is a freely transferable instrument, it has high liquidity;
(III) It provides more funds compared to other sources. Generally, the cost of
CP to the issuing firm is lower than the cost of commercial bank loans;
(IV) A commercial paper provides a continuous source of funds. This is
because their maturity can be tailored to suit the requirements of the
issuing firm. Further, maturing commercial paper can be repaid by
selling new commercial paper;
(V) Companies can park their excess funds in commercial paper thereby
earning some good return on the same.

Limitations

i. Only financially sound and highly rated firms can raise money
through commercial papers. New and moderately rated firms are not
in a position to raise funds by this method;
ii. The size of money that can be raised through commercial paper is
limited to the excess liquidity available with the suppliers of funds at
a particular time;
iii. Commercial paper is an impersonal method of financing. As such if a
firm is not in a position to redeem its paper due to financial
difficulties, extending the maturity of a CP is not possible.

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