The effective functioning of the finance sector is one of the essential aspects that can strengthen a country’s growth and development.
Different types of banking services are available these days that focus on other 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 more comprehensive and influential services to help people 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 economic growth, but their speciality areas are different, as we can see in the cases of Merchant Banks and Development Banks.
Key Takeaways
- Merchant banks engage in underwriting, advising, and fundraising for businesses; development banks provide financial support for economic development and social projects.
- Merchant banks focus on private sector transactions, while development banks target both the public and private sectors.
- Development banks are often government-owned or backed, whereas merchant banks are private institutions.
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. In contrast, the benefits of Development Banks are available to anyone from the industrial and agricultural sectors.
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Comparison Table
| 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 services in the areas of marketing, financial, legal, and managerial matters for their clients | Almost all sizes, 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 speciality clients such as corporations and high net-worth individuals | We provide long-term and medium-term loans to clients from the industrial and agricultural sectors with comparatively low-interest rates. |
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 benefits of a Merchant Bank are not for ordinary people, unlike other commercial banks.
Merchant Banks offer consultancy services to their clients. Their consultancy comprises the areas of marketing, financial, legal, and managerial matters. Merchant banks do not provide general banking services like checking accounts and do not receive customer deposits.
The speciality of Merchant Banks is international trade, and they are brilliant at dealing with multinational corporations.
J.P. Morgan, Citigroup, and Godman Sachs are significant Merchant Banks worldwide.
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 business people to begin a business and raise finance. It can be helpful to modernize or restructure the company.
The consultancy services of a Merchant Bank can be helpful to revive a dying business or help companies to register, buy, and sell shares on the stock exchange. The first Merchant Bank in India was started by Grindlays Bank in 1967 and has been a huge success ever since.
The primary 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 advice.
- Public issue management
- Portfolio management
- Leasing services
- Operation of money markets
- Control of interest and dividends
- Working on 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 finance institutions offer the services of term lending and investment in securities, besides offering similar services.
In essence, a development bank is a financial bank functioning mainly to provide term lending to the industrial as well as agricultural divisions of the country.
A development bank can give business units financial assistance for long and medium durations through guarantee and investment operations, underwriting, loans, and promotional activities.
The development of a state or country in all realms is the primary goal of establishing 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 for 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
- Progress 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. The 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 country’s agricultural sector. 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 this kind of bank 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 focuses on the finance raising for their clients. In contrast, a development bank aims for the country’s economic growth.
- Merchant Bank offers services to specialized clients, but Development Bank offers 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. In contrast, Development Bank offers long-term loans for their clients to strengthen various areas of development.
- Merchant Bank works 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 its clients. At the same time, development bank focuses on the self-employment of individuals and creating more employment opportunities for people to make them self-sufficient.
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
