Merchant Bank vs Development Bank
A merchant bank is a financial institution for large companies that provides a range of services. These services include lending, advising, underwriting, fundraising, etc. They expertise in international trade. This is the reason they are most commonly approached by multinational corporations (MNCs).
A development bank is more of a national financial institution that exists to give a boost to the growth of the country’s economy. It provides services such as lending for medium-term and long-term capital requirements. They also provide technical assistance. They cater to the needs of the agricultural and industrial sectors.
A development bank focuses on the growth of society, whereas a merchant bank focuses on the growth of profits. Their target market is very different, and their motives as well.
The difference between a Merchant Bank and Development Bank is that a Merchant Bank is responsible for maintaining accounts and facilitating transactions of Multinational Corporations, whereas a Development Bank is more focused on the country’s industrial and agricultural sectors.
Comparison Table Between Merchant Bank and Development Bank (in Tabular Form)
|Parameter of Comparison||Merchant Bank||Development Bank|
|Presence||These are usually present globally, having branches in different nations.||These are different for each country.|
|Purpose||It acts as a mediator between companies and investors, providing financial services such as raising capital.||The development bank is usually a country’s development-oriented bank providing financial assistance to business units.|
|Income||These are fee-based institutions.||These are fees and fund-based institutions that have two-fold income.|
|Ownership||Private companies usually own these.||The government fully or partially supports these.|
|Clients||It provides services to both national and multinational companies.||It provides services to mostly national firms.|
|Example||Goldman Sachs, Citigroup, J.P. Morgan, etc.||India - Industrial Finance Corporation of India (IFCI), National Bank for Agriculture and Rural Development (NABARD)|
What is Merchant Bank?
Merchant Banks were first founded in Italy and France in the 17th and 18th centuries. Barings Bank is the most former Merchant Bank in the United Kingdom, which was founded in 1762. The world’s most former Merchant Bank is Berenberg Bank. Merchant Bank came into existence to facilitate fundraising for the companies by issuing equity and providing underwriting services.
These do not provide their services to the general public. Their customers are mostly multinational corporations that have operations in different locations across the globe. These companies take financial assistance from a bank that has its branches in these locations so that there can be a smooth flow of transactions.
Their main functions include equity underwriting, facilitating loan sanctions, management of the company’s portfolio, etc. These banks help the clients to raise capital for their companies by the issue of shares or debentures. They also act as brokers by facilitating transactions of the stock exchange by linking investors and companies. They also help in maintaining the company’s portfolio by providing advisory services such as project counseling, corporate counseling, etc. These act as financial engineers for firms. These also help small companies and entrepreneurs. In India, the first Merchant Bank was Grindlays Bank, which was founded in 1967.
What is Development Bank?
Development Banks are set up to promote growth and provide infrastructural and financial services to both public and private sector enterprises. They aim to boost industrial growth and have a balanced development by also focusing on backward areas. They work for the betterment of society. Thus, their objectives also include generating more employment and encourage international transactional, i.e., exports and import substitutions.
These try to help the domestic businesses to grow by making the technological advancements more accessible. They also encourage entrepreneurship as it creates more employment opportunities. It also helps to improve the country’s capital market and correct regional imbalances. The Development Banks in India are arranged in four groups: Industrial development banks such as Finance Corporation of India (IFCI), Export-Import development banks such as Export-Import Bank (EXIM), Agricultural Development Banks such as National Bank for Agriculture and Rural Development (NABARD) and Housing development banks such National Housing Bank (NHB). The first Development Bank in India, Industrial Finance Corporation of India (IFCI), was found in 1948.
These provide both medium-term and long-term loans. These usually accept deposits from Central and State Governments. This means that they are generally wholly/partially owned by the government.
Main Differences Between Merchant Bank and Development Bank
- Private players run merchant Banks, whereas Development Banks usually have some proportion of government ownership.
- Merchant Banks are focused on providing financial services to multinational companies, entrepreneurs. The objective of the Development Bank is to promote balanced growth and boost the country’s industries.
- The source of income for Merchant Banks is usually the fee charged from the clients, whereas the income of Development banks are both fee and fund based.
- Merchant Banks do not provide services to general citizens, whereas Development Banks are mostly focused on assisting all the small enterprises.
- Merchant Banks provide financial and advisory services to companies such as portfolio management for availing loans, whereas Development Banks provide infrastructural and financial services.
A Merchant Bank is similar to a Development Bank, but it provides a range of advisory services besides financial assistance to the companies. They manage the international transaction and help the companies to maintain creditworthiness, raise capital, and take on useful projects. They also act as brokers and support the companies to get connected to investors.
On the other hand, the Development Banks are mostly focused on promoting a country’s growth by encouraging self-employment, generation of more employment opportunities, removing regional disparities, and providing infrastructural facilities. They provide loans on a medium-term and long-term basis to the industries for expansion purposes.
Both types of banks are essential to a country for the improvement of the company because each caters to a different set of audience. The Merchant Banks do not cater to the developmental needs of society. Still, they are more focused on helping significant firms become more profitable, whereas Development banks are more socially oriented.
Thus, both the types of banks help to maintain a balance in the country so that both the beneficial aspects and the social development aspects are given proper attention.
Word Cloud for Difference Between Merchant Bank and Development Bank
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