There has been always a misconception that both commercial banks and merchant banks are similar and offer identical services. Therefore, in this article, we will discuss what is the difference between commercial banks and merchant banks.
Commercial banks are those financial institutions whose primary function is accepting deposits and granting loans/ advance to individuals, trade and businesses. In addition, commercial banks also provide various other financial services to their customers.
Merchant banks, on the other hand, are the financial companies providing consultancy, wealth raising, financial advising and investment banking solutions to large businesses and corporations.
Commercial Bank and Merchant Bank:
Commercial banks and merchant banks can be distinguished based on kinds of services they provide and to whom they provide these services.
The major functions of commercial banks are:
- Accept Deposits
- Avail Loan and advance
- Open Bank Accounts (Saving, current, RD)
- Deal in foreign exchange
- Debit card and credit card
- Internet banking services
- Mutual funds
- Cheque negotiations
- Other services
However, major services provided by merchant banks are:
- Underwriting of Securities
- Business Loan Syndication Services
- Financial advisory services
- Fundraising through private placement for mediocre companies
- Legal and Regulatory Service
- Facilitates international trade and transactions
- Fundraising services to medium, large and multinational corporations and persons having high net worth.
Difference between Commercial Banks and Merchant Banks:
Just go through the following comparison table to understand the difference between commercial banks and merchant banks.
|BASIS OF COMPARISON||COMMERCIAL BANK||MERCHANT BANK|
|Meaning||Commercial banks are those financial institutions whose primary function is accepting deposits and granting loans/ advance to individuals, trade and businesses||Merchant banks are the financial companies providing consultancy, wealth raising, financial advising and investment banking solutions to large businesses and corporations.|
|Governing Act/ Body||Banking Regulation Act, 1934 Reserve Bank of India||SEBI (Security and Exchange Board of India)|
|Major Services Offered||Normal Banking Services||Corporate fundraising Services, Merger & Acquisition Services|
|Portfolio Management Service||NO||YES|
|Loan Syndication Service||NO||YES|
|Source of Income||Interest income from loans||Fees charges for different services|
Commercial bank vs Merchant bank:
Let us conduct a head to head comparison between commercial banks and merchant banks so that you can understand easily.
- Commercial banks are the financial institutions regulated by the Reserve Bank of India typically offer general banking services to individuals as well as business organisations, on the other hand, merchant banks are the financial companies offer their services to the business corporation and high net worth persons.
- Commercial banks are governed under the Banking Regulation Act, 1949, however, merchant banks have to follow the guidelines of SEBI (Security and Exchange Board of India) because of the kind of services they offer to their clients.
- Commercial banks provide only regular banking services to their corporate customers, on the other hand, merchant banks provide a range of services on corporate financing and fundraising to their clients.
- Commercial banks act as a financer for the business enterprises and charge interest on the loan given whereas merchant banks act as a financial advisor for corporates and charges some fees for the services they provided.
- Merchant banks also provide portfolio management services to institutional investors or other investors and facilitate the management of securities, on the other hand, commercial banks don’t provide such services.
- Merchant banks also provide loan syndication service, that means it helps in the processing of loan application from commercial lenders like banks or financial institutions and cost estimation of the entire project, on the other hand, commercial banks don’t offer such service instead they disburse loan based on the creditworthiness and previous credit history of the borrower.
- The main source of income of commercial banks is interest income and service charges for various other services they provide, however, the source of income of merchant banks is the fees against a variety of services they offer to corporations.
In fact, there are different angle on which we can differentiate merchant banks from commercial banks. Hope I have covered all the significant aspects of comparison. In a nutshell, I would like to conclude the above lesson based on the array of services offered and their clientage. We can say that commercial banks cater to the requirements of the general public and enterprises, however, merchant banks fulfil the needs of large organisations and high valued individuals.
Moreover, commercial banks provide the basic banking services and merchant bank provides equity finance and advisory services.