The effective functioning of the finance sector is one of the important aspects that have the power to strengthen the growth and development of a country. Different types of banking services are available these days that focus on different areas. Merchant Banks and Development Banks are part of them.
People need banking services to support their businesses and other finance-related dealings to grow their wealth. Banking is not limited to mere deposits and loan lending these days. It has wider and influential areas of services to help people to attain financial stability.
The effective utilization of the services obtained by different financial institutions is mandatory for a person to utilize the services of such an institution effectively.
All kinds of financial institutions are working to provide financial growth but their specialty areas are different as we can see in the cases of Merchant Banks and Development Banks.
Merchant Bank vs Development Bank
The difference between merchant banks and development banks is that the services of the merchant bank are for corporations and high net worth personnel while the services of Development Banks are available to anyone from the industrial as well as the agricultural sector.
Comparison Table Between Merchant Bank and Development Bank (in Tabular Form)
|Parameter of Comparison||Merchant Bank||Development Bank|
|Aim||Finance raising for their clients||To promote the economic growth of the country|
|Areas of functioning||Loan lending and consultancy service in the areas of marketing, financial, legal, and managerial matters for their clients||Almost all areas including businesses, industries, agriculture, housing, employment, etc.|
|Deposits||Deposits are not received from clients||customers can make deposits such as savings in development banks|
|Mode of function||Consultancy services, stock exchange broker||From the capital provided by the central or state government|
|Loan lending||Limited to the specialty clients such as corporations and high net worth individuals||Providing long-term and medium-term loans to clients from the industrial and agricultural sector and the interest rate is comparatively low.|
What is Merchant Bank?
A Merchant Bank can be termed as a financial company that provides loan services, guaranteeing, fundraising, and financial advising for big corporations besides individuals with high net worth. The services of Merchant Bank are not for the common people, unlike other commercial banks.
Merchant Banks offers consultancy services to its clients. Their consultancy comprises the areas of marketing, financial, legal, and managerial matters. Merchant banks do not offer general banking services like checking accounts and do not receive deposits from customers.
The specialty of Merchant Banks is an international trade and they are brilliant in dealing with multinational corporations.
J.P. Morgan, Citigroup, and Godman Sachs are a few of the major Merchant Banks across the world.
The consultancy services offered by a Merchant Bank means to give guidance, service, and advice to the clients for a fee. It is beneficial for businessmen to begin a business and raise finance. It can be useful to modernize or restructure the business.
The consultancy services of a Merchant Bank can be useful to revive a dying business or help companies to register, buy, and sell the shares at the stock exchange. The first Merchant Bank in India was started by Grindlays Bank in 1967 and was a huge success ever since.
The major functions of a Merchant Bank can be listed as follows.
- Finance raising for clients
- Function as a broker in the stock exchange
- Project management
- Provide modernization and advancing advices
- Public issue management
- Portfolio management
- Leasing services
- Operation of money markets
- Management of interest and dividends
- Working for getting Government consent for industrial projects
- Reviving sick companies, and other similar responsibilities.
What is Development Bank?
Development Banks are financial institutions that have been established to provide infrastructure amenities to a country to enhance its industrial growth. Development banks provide long-term or medium-term kinds of finance to the agricultural as well as industrial sectors.
These multi-purpose institutions of finance offer the services of term lending as well as investment in the form of securities besides offering other similar services. In essence, a development bank is a financial bank functioning mainly to provide term lending to the industrial as well as agricultural division of the country.
A development bank can give financial assistance for long and medium durations to business units in the form of guarantee and investment operations, underwriting, loans, and promotional activities. The development of a state or country in all realms is the main goal of the establishment of a development bank.
The main objectives of a development Bank can be listed as
- Promotion of Industrial growth
- Development of backward areas
- Creation of more opportunities for employment
- Promotion of exporting and importing sector of the country
- Promotion of technological development and modernization
- Promotion of self-employment projects of people
- The revival of sick industrial or business units
- Management training to large industries for improvement
- Eliminating regional imbalance and disparities
- Provision of risk capital for the promotion of science and technology
- Improvement of the capital market in the nation.
There are four types of development banks in India. They are: –
Industrial Development Banks: They focus on the growth and development of the industrial sector. Industrial Finance Corporation of India (IFCI), Small Industries Development Bank of India (SIDBI) and Industrial Development Bank of India (IDBI) are examples of Industrial Development Banks.
Agricultural Development Banks: They focus on the growth and development of the agricultural sector of the country. National Bank for Agriculture and Rural Development (NABARD) is an example of the Agricultural Development Bank in India.
Export-Import Development Banks: They focus on the growth and development of the export-import sector of the country. Export-Import Bank of India (EXIM Bank) is an example of these kinds of Banks in India.
Housing Development Banks: They focus on the housing development sector of the country. The National Housing Bank (NHB) is an example of this kind of bank in India.
Main Differences Between Merchant Bank and Development Bank
- The main difference between Merchant Bank and Development Bank is Merchant bank is focusing on the finance raising for their clients whereas development bank aims for the economic growth of the country.
- Merchant Bank offers its services for specialized clients but Development Bank offers its services to almost all areas of the country.
- Merchant Bank focuses on money raising, consultancy services, and broker services in stock exchanges for their clients whereas Development Bank offers long term loans for their clients to strengthen various areas of development.
- Merchant Bank is working for the private sector whereas Development Bank is formed and promoted by state and central governments.
- Merchant Bank tries to strengthen the financial areas of their clients while development bank focuses on self-employment of individuals and the creation of more employment opportunities for people to make them self-sufficient.
To gain financial stability, all individuals, businesses, industries, etc., need to manage their funds effectively. For huge industries and high net worth individuals, Merchant Bank is a trusted aid to protect and grow their wealth.
Developments Banks are established by the state or central Governments to contribute to the growth and development of the country in all areas. Adapting more technological support in the relevant areas, modernization, better housing and employment provisions are parts of their aim.
Knowing about them is a better way to make use of their services effectively.
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