Difference Between Merchant Bank and Development Bank

Edited by Diffzy | Updated on: August 27, 2022

       

Difference Between Merchant Bank and Development Bank Difference Between Merchant Bank and Development Bank

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Introduction

A bank is a type of financial institution that offers financial services. The generation of new money, the transformation of assets, and financial intermediation significantly contribute to economic growth. They also serve as enterprises' most significant funding source by directly financing, lending money, purchasing bonds, and financing customers. Commercial banks and development banks are the three divisions of banks. People require banking services to build their wealth to support their enterprises and other financial activities. These days, banking extends beyond simple loan lending and deposit-taking. It offers broader and more effective services to assist people in achieving financial stability.

To use a financial institution's services successfully, one must make efficient use of various financial institutions' services. For example, the Commercial Bank is a bank set up to provide standard banking services like taking deposits, lending money, etc. In contrast, a development bank is a multipurpose financial organization created to support the industrial and agricultural sectors to promote development financially.

Merchant Bank vs. Development Bank

The fundamental distinction between merchant banks and development banks is that the former cater to businesses and high net worth individuals, whilst the latter offer their services to anybody in the agricultural as well as the industrial sectors. Merchant banks primary goal is to generate a profit by collecting interest from high-interest loans. On the other hand, development banks pursue social profit through implementing development initiatives.

Difference Between Merchant Bank And Development Bank in Tabular Form

Table: Merchant Bank vs. Development Bank
Parameters Of Comparison
Merchant Bank
Development Bank
Areas of operation
For their clients, they provide loan financing and consulting services in the fields of marketing, finances, law, and management.
Almost every sector, including commerce, the arts, the food industry, housing, jobs, etc.
Lending a loan
restricted to niche consumers like businesses and extremely wealthy people
Offering clients in the industrial and agricultural sectors long- and medium-term loans with competitively low-interest rates.
Method of operation
Consulting services and stock broker
utilizing the funding supplied by the federal or state government
Deposits
Client deposits are not collected.
Customers can deposit money in development banks, such as savings.
Origin of funding
Collect money by allowing public deposits.
Grants, loans, and the sale of securities.
Loans were mad
loans with short and medium terms
Long- and medium-term loans
Provided services
Legal, business and credit investigation services are offered for a set charge.
Advisory and counseling services are provided to aid in the growth and marketing of the company.
Orientation
Profit-driven
development-focused
Purpose
To generate social benefit by contributing money to programs that promote development.
To get money by making loans at high-interest rates.

What Is Merchant Bank?

A merchant bank may be defined as a financial institution that offers high-net-worth individuals and large enterprises lending services, guaranteeing fundraising and financial advice. Unlike other commercial banks, Merchant Bank does not offer services to the general public. Instead, merchant Banks provide their clientele with consulting services. They suggest consulting services in marketing, finances, law, and management. Merchant banks do not accept client deposits and do not provide standard banking services like checking accounts. International commerce is a merchant bank's area of expertise, and they excel at working with global firms.

Purpose Of Merchant Bank

Traditionally, merchant banks typically engage in underwriting securities, but some merchants also engage in the business of financing commerce. A merchant bank is distinct from a regular bank in that they do not fall within the concept of banking. They don't take deposits for safekeeping and don't offer interest on deposits. Their activities are entirely different from those of a typical banking company, as defined by section 5 of the Banking Regulation Act of 1949, which states that "banking" means accepting public money deposits for lending investments that are repayable on demand or in another manner and withdrawing that money by check, draught, order, or in another way. Any organization that does financial transactions is referred to as a "banking company" (in India).

Merchant banks are highly specialized, professionally run financial organizations with a track record of providing clients with guidance. After doing a suitable risk analysis about the money, they obtained concerning wealth generation. The underwriting of securities, trading in stocks and bonds, mergers and acquisitions, private equity placements, corporate restructuring, syndicating of loans, pricing of deposits, etc., are all areas in which such professional assistance may be relevant.

The Objectives of Merchant Banking

Merchant bankers are crucial since they make it easier to accomplish the following goals:

  • They aid in the generating of capital.
  • The causes driving the development of a secondary market, which supports current industrial activity in the nation, include merchant banking operations.
  • Merchant banks support and encourage commercial enterprise.
  • They do various tasks related to project report creation, market research, and pre-investment surveys.
  • The merchant bankers provide venture capitalists with appropriate financial backing.
  • They create a data bank as their human resources.
  • Additionally, they provide mortgage financing.
  • For new businesses, merchant bankers are a valuable source of seed money.
  • One of the main tasks performed by merchant bankers is problem management.
  • Another area of competence for merchant bankers is underwriting.
  • They locate new projects on behalf of their clients and aid in securing necessary permissions from various government agencies.
  • They offer services related to the distribution of financial clearing.
  • The merchant bankers make it easier to raise public finances.

Merchant Banking Types

  1. Full-Service Global Merchant Banks: This group of merchant banks is distinguished by its global presence and comprehensive service offerings. They are often critical financial institutions, the services used by sizable businesses, typically global juggernauts.
  2. Regional Investment Banks: Also known as "specialty investment banks," regional investment banks primarily serve the demands of customers in a specific geographic area. They are in a position to provide the services following the needs of their clients since they have a thorough understanding of the market in that region.
  3. Boutique Investment Firms: These are investment banks that are modest in size and only operate locally in a specific geographic location. They provide services related to particular fields or goods in which they specialize. In addition, their expertise in consulting services, such as mergers and acquisitions, makes them highly sought-after for specific projects.

Benefits of Commercial Banking

Following are some reasons why merchant banking is essential:

  1. Make Use of the Financial Surplus: Merchant bankers assist in channeling the public's surplus cash into business routes for their practical use.
  2. Coordinate the Activities: Several intermediaries, such as the registrar, bankers, advertising agency, underwriters, brokers, etc., are involved in the "share offering" process. Merchant bankers serve as a coordinating body, ensuring that all of their coordinated actions are carried out in unison.
  3. Compliance with Laws and Regulations: They are crucial in ensuring that the corporate market players follow the different rules and regulations relevant to the securities market.
  4. Identification of Investment Prospects: They locate and take advantage of the numerous local and international investment opportunities.

Drawbacks of Merchant Banking

  • The services provided by merchant banks might be targeted at major corporations and tiny businesses owned by people with solid financial backgrounds.
  • The commercial bankers' cases are likely to be somewhat successful or, in some circumstances, downright disastrous.
  • Risks abound due to the nature of the services provided by merchant bankers.

What Is Development Bank?

Development banks are financial organizations created to offer infrastructure facilities to a nation to support its industrial expansion. Development banks provide both the agricultural and industrial sectors with long- or medium-term forms of financing. Along with providing other comparable services, these financial organizations with multiple uses also offer term loans and investments in the form of securities. A development bank is essentially a financial institution that works primarily to give long-term loans to the nation's industrial and agricultural sectors. In addition, a development bank can provide business units with long- and medium-term financial support through underwriting, loans, guarantee, investment operations, and promotional efforts. The creation of a development bank has as its primary objective the growth of a state or nation in all spheres.

Purpose Of Development Bank

The development banks are expert financial institutions that carry out the dual tasks of awarding medium and long-term finances to private entrepreneurs and acting as promoters for the nation's economic development. Unlike other commercial banks, the development banks do not mobilize savings. Instead, they invest the resources productively and efficiently. Additionally, they support both the public and private sectors. The Industrial Development Bank of India (10), the Industrial Credit and Investment Corporation of India (CIC), and the Export-Import (EM) Bank of India are some of the most well-known development banks in India.

Characteristics Of Development Bank

  • The development banks do not take public deposits as commercial banks do. As a result, they do not just rely on saving mobilization.
  • Specialist organizations that offer medium- and long-term lending are development banks.
  • lending resources
  • Rather than seeking financial gain, their primary goal is to serve the public good.
  •  They give institutions in the public and private sectors financial support.

Importance of Development Banks

  • Creates the framework for the nation's industrial development
  • Provides for ongoing capital needs
  • Engages in marketing initiatives
  • Aids small and medium-sized businesses

Objectives of the Development Bank

  • Encouragement of industrial expansion
  • The creation of job opportunities
  • Support for projects involving self-employment
  • Reviving sick units
  • Developing the nation's capital market
  • To increase exports and encourage import replacement
  • Expand risk capital to advance research and technology in new fields
  • Providing significant industries with the necessary skills to improve their management
  • Promoting innovation and modernization in the technology sector

Types Of Development Banks

  1. SIDBI: A parliamentary act established the Small Industries Development Bank of India (SIDBI) in 1990. It belonged to the Industrial Development Bank of India as a wholly owned subsidiary. Thirty-three organizations acknowledged or controlled by the Indian government now hold most of the shares in SIDBI. Lucknow is home to SIDBI's main office.
  1. NABARD: The central development bank in India is the National Bank for Agriculture & Rural Development (NABARD). Its primary objective is to improve rural India by boosting loan flow to support the agricultural and non-agricultural sectors. Bombay is home to NABARD's central office (Maharashtra). It is regarded as the nation's apex bank and provides financial support to rural businesses such as cottage industries, small and village corporations, and other rural institutions.
  1. EXIM Bank: Known As The Export-Import Bank of India Act of 1981 established the Export-Import Bank of India (EXIM Bank) as a financial organization. It is a financial institution in the public sector. The EXIM Bank's primary goal is to finance Indian exports, which bring in foreign currency for the nation. Term loans are also provided for international commerce. The Indian government owns all of the stock in the EXIM Bank, which is a statutory company. It was founded on January 1st, 1982, to finance, facilitate, and promote international commerce.

Main Difference Between Merchant Bank And Development Bank in Points

  • The significant distinction between a merchant bank and a development bank is that the former concentrates on raising capital for its clients while the latter pursues national economic development.
  • While Development Bank provides services to the whole nation, Merchant Bank caters to more niche clientele.
  • While Development Bank provides long-term loans for its clients to improve various development sectors, Merchant Bank concentrates on money raising, consulting services, and stock exchange broker services.
  • The commercial sector is served by Merchant Bank, while state and federal governments create and support Development Bank.
  • In contrast to development banks, which concentrate on helping people become self-sufficient through increased employment possibilities, merchant banks work to boost their clients' financial positions.
  • Development banks do not maintain loan and account balances on their premises. However, they assist and direct the consumers through consultations, talks, and authorizing loans. In addition, they offer merchant banking services as a merchant bank. This involves participating in issuing shares, accepting share applications, and maintaining share application accounts.
  • There are no independent merchant banks anymore. Therefore banks instead assign part of their branches to carry out merchant banking operations. Typically, large-sized bank branches with many components are given the merchant banking business.NABARD, the Export-Import Bank of India, the Small Industries Development Bank of India, and others are a few examples.

Conclusion

All people, corporations, industries, etc., need to handle their money well if they want to achieve financial security. Merchant Bank is a dependable resource to safeguard and increase capital for large enterprises and high-net-worth people. State or federal governments create development banks to support the expansion and development of the nation across all sectors. Their goal includes modernization, improved housing, work options, and the adoption of more excellent technical support in the pertinent sectors. The best approach to using their services efficiently is to be aware of them.

References

  • https://testbook.com/learn/development-banks-in-india/

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"Difference Between Merchant Bank and Development Bank." Diffzy.com, 2022. Sun. 02 Oct. 2022. <https://www.diffzy.com/article/difference-between-merchant-bank-and-development-bank-959>.



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