Difference Between Commercial Bank and Merchant Bank

Edited by Diffzy | Updated on: July 16, 2022

       

Difference Between Commercial Bank and Merchant Bank Difference Between Commercial Bank and Merchant Bank

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Introduction

Banks are intermediaries between depositors and borrowers. They're the institutions of finance that are charged with the process of taking deposits, lending, and offering a variety of investment options.

It's important to remember that different banks are not identical. There are various kinds of banking institutions, each tasked with additional responsibilities. They include two main types of banking, merchant and commercial banking.

The roles of these two services are determined by their nature and the type of financial service they're associated with.

Commercial Bank vs. Merchant Bank

The primary distinction between Commercial Bank and Merchant Bank is  a commercial bank that was created to offer general banking services like opening a bank account or providing loans to individuals. At the same time, a merchant bank is a bank that provides its services to businesses primarily and is specialized in trading internationally

Difference Between Commercial Bank and Merchant Bank in Tabular Form

Table: Commercial Bank vs. Merchant Bank
Parameters for Comparison
 Commercial Banks
Merchant Banks
Significance       
Bank establishment that accepts deposits from the public and lends money.     
An international trading bank that offers a broad range of financial services to multi-national corporations and clients with high net worth.
Governing Body
Following the 1949 Banking Regulation Act  
Conducted following the SEBI rules and regulations
Services offered
Services in general banking    
Services in banking consultancy
Risk Exposure   
Less 
Commercial banks have less than commercial banks.
Economic Impact
Commercial banking has a major impact on the economy in the area it provides its services..
Merchant banking has a major impact on large corporations that it provides its services. This can have an impact on the stock market and national economies.
Accessibility
All people with basic banking needs can access commercial banking.
Merchant Banking is only available to wealthy people or large corporations.
Earnings
Commercial banks' primary earnings are the interest they receive on different loans. Other earnings include fees earned on services such as ATMs and checking accounts.
. Merchant banking earns its primary income through advisory fees.
Role
Financer
Financial Advisor

What Is a Commercial Bank?

A commercial bank could be described as a financial intermediary that provides various financial services to the public and corporations. They are profit-making companies controlled and owned by a group of individuals.

The principal purpose of a commercial bank is to take deposits and provide loans. However, it also helps its clients by offering services like:

  • The disbursement of payment
  • Funds for collection
  • Offering working capital financing
  • Safeguarding valuables
  • Securities that are purchased and sold
  • Bank overdraft
  • Credit card for cash
  • Discounting bills of exchange

It also offers various services to customers, such as accounts for savings, currently fixed deposits, certificates of deposits, etc. Interest on deposits is provided to account holders, and the bank is charged interest on loans made by the client. The interest rate for loans or deposits is based on the kind of product chosen by the client.

Types of Commercial Banks

Public Sector Banks

They are nationalized banks and comprise more than 75 percent of all banking transactions. The State owns the majority of the stakes in these banks. Quantitatively, SBI is the largest public sector bank in India. Following the merger with five associate banks (as of 1 April 2017) April 2017), it has earned an enviable position among the 50 top banks in the world.

Private Sector Banks

This includes banks where private shareholders own the most significant equity stake. All rules and regulations governing banking set by RBI will also apply to private sector banks. Below is a list of banks that are private sector in India.

Foreign Banks

Foreign banks are those with their headquarters in a foreign country. However, they operate as a private entity in India in the form of a privately owned institution. They are also obligated to adhere to the regulations of their home country and the country where they operate. Below is a list of banks from abroad working in India

Regional Regular Banks

They are also known as scheduled commercial banks. Still, they are set up to lend to less privileged groups of society, such as farmers, agricultural laborers, and small-scale enterprises. They typically operate at regional levels across various states of India and can have branches in some urban regions, too. Other functions performed by RRBs are:

  • Offering financial and banking services to semi-urban and rural regions
  • Government-related operations, such as the disbursement of wages to MGNREGA employees, distribution of pensions, etc.
  • Para-Banking facilities include credit cards, debit cards, locker facilities, and lockers.

Small Finance Banks

It is a specific segment of the banking industry thriving in the country. It will provide financial inclusion to a part of society not accessible to other banks. The principal clients of these banks are:

  • Micro-industries.
  • Small and marginal farmers.
  • Non-organized sector organizations.
  • Small-sized business units.

They have been licensed by Section 22 of the Banking Regulation Act 1949 and are subject to the RBI Act, 1934, and FEMA rules.

Cooperative Banks

Cooperative banks are regulated following the Cooperative Societies Act, 1912, and are managed by an elected management committee. They operate on a zero-profit, zero-loss basis. They are primarily geared towards entrepreneurs, small-scale businesses, and self-employment in urban regions. These especially finance agricultural activities such as livestock production, farming, and hatcheries for rural areas.

State Co-operative Branks

State Cooperative Bank State Cooperative Bank is a union from the Central cooperative bank that is the custodian of a unified banking structure within the State.

Banks are also classified according to Scheduled and Non-Scheduled Banking. Every person must determine whether they're holding their savings or deposit accounts with a Scheduled Bank or Non-Scheduled Bank. Scheduled banks are also covered by the depositor insurance program offered by Deposit Insurance and Credit Guarantee Corporation (DICGC) and are advantageous for all account holders who have an account for savings or fixed/ongoing deposit accounts. Below DICGC, the bank bonds up to Rs . 1 lakh, all-encompassing of current, fixed, fortification, and regular deposits, per bank and depositor in bank indebtedness are protected.

Scheduled Banks

Banks scheduled for coverage in The 2nd Schedule in the Reserve Bank of India Act 1934. To be able to qualify as a scheduled bank, the institution must meet the following requirements:

  • A bank with capital paid up of more than Rs. 5 Lakh and above is eligible to be a scheduled bank.
  • A bank must satisfy Central Bank that its activities are conducted in a manner that causes harm to the interests of depositors.
  • A bank must be a corporate entity, not a sole proprietorship or partnership company.

Non-Scheduled Banks

Non-scheduled bank refers to the local area banks not included in the Second Schedule of the Reserve Bank of India. Non-scheduled banks also have to meet the cash reserve requirement, not with the RBI but rather in conjunction with them.

What Is a Merchant Bank?

Merchant banks are the bank that offers both consultancy and financial services to their customers. It has expertise in international finance, sub writing, and business loans. It also engages in the development and promotion of industrial projects like:

  • The syndication of loans
  • Portfolio management
  • Capital issue underwriting
  • Project Counselling
  • Issue management
  • Services for advising on mergers and buyouts, acquisitions as well as takeovers.
  • Restructuring of the corporate
  • Acceptance of bills

A merchant bank is a financial institution that aims to meet the requirements of advisory services for large enterprise ventures and wealthy individuals. It provides financial assistance to multinational corporations. It manages the administration of currency exchange when money is transferred. It also aids companies in offering securities through private placements, which don't require adherence to the legal formalities like an initial public offering (IPO).

Types of Merchant Banks

Banks that offer merchant banking are the process of providing a variety of financial and consulting services.

The merchant bank is a business that offers consultancy services and other ones like the provision of fund loans to large companies or any person with a substantial net worth.

The general public cannot access the services of a bank that is a merchant.

 SEBI has declared four types of merchant bankers eligible for registration:

 Type I Merchant bankers of Type I offer services such as underwriting and consulting portfolio management, advice, and issue management.

 Type II They can conduct underwriting, consultation advice, portfolio management, and underwriting; however, they aren't required to be involved in issue management. They can co-manage instead.

 Type III They cannot do issues managing, co-managing, or even managing portfolios. They have the authority to conduct underwriting, consultation, and providing advice.

 Type IV They can only provide consultation and advice in the event of any capital issue.

Main Differences Between Commercial Banks and Merchant Banks in Points

  1. A financial intermediary located in a specific location that has the sole purpose of offering the most basic financial services to the general public, including the acceptance of deposits and disbursement loans, is referred to as the Commercial Bank. In contrast, the financial institutions established have the primary purpose of offering financial advisory services and consulting to customers who have high net worth and multinational corporations.
  2. The principal source from commercial banks to earn their earnings is the interest earned by paying out various kinds of loans, including auto loans, mortgages issued and house loans, Small Business Finance Loans, etc. In addition, the other profits that commercial banks earn are the fees derived from different services, such as fees from the issue of the ATM card, and also for providing services associated with it, such as opening and maintaining a customers' checking account, the rental on the safe deposit box, and so on.
  3. On the other hand, a merchant bank earns its primary income through charges for advice services offered to large clients. Merchant banks provide a range of services for their customers, mostly related to investment of depositor's assets in a financial portfolio according to their needs and then judiciously managing the investments to ensure customers receive a substantial amount of money from those investments, and in return merchant banks collect fees from the customers. In addition to these charges, they also make significant capital investments within private businesses that are currently in their growth phase. When the stakes of these investments are sold later at an earlier stage, the company earns money.
  4. The effect of both the banks are on different economies. In the case of commercial banks, its primary product is on the area's economy. It provides its services since the amount of money is offered as the customers use loans to buy new homes and other essential areas. It can also lead to creating jobs and thus affect the local economy.
  5. The primary business of a commercial bank is in traditional banking services, while merchant banks excel at providing consulting and advisory services to their customers.
  6. The primary business of a commercial bank is in traditional banking services, while merchant banks excel at providing consulting and advisory services to their customers.
  7. In contrast with Banks that deal in Merchant Banking, its principal effect is on the large corporations to which they provide their services. The large corporations invest their funds in the share market and impact prices on the stock market and the economy in general.
  8. Since the principal function of commercial banks is to offer loans to their clients, Their position is similar to that of a banker. The primary purpose that merchant banks perform is to provide assistance and guidance to their customers, which is why their role is similar to that of an advisor to financial matters.
  9. Concerning risks, commercial banks are less prone to lose or incur another financial risk while they are. However, they are more susceptible to more trouble.

Conclusion

Both commercial and merchant banks function as financial intermediaries, catering to the various demands of the customers they serve. They're, however, different. They're also not in the same range of products and services.

Merchant banks charge fees for the consulting and advisory services they provide. Commercial banks, however, profit from the service fees they charge for the services they offer, such as ATMs, mobile banking, and net banking.

Additionally, although commercial banks offer a repository service to save, merchant banks do not.

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"Difference Between Commercial Bank and Merchant Bank." Diffzy.com, 2022. Fri. 12 Aug. 2022. <https://www.diffzy.com/article/difference-between-commercial-bank-and-merchant-bank-201>.



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