This article will help you to learn about the difference between commercial banks and merchant banks.
Difference between Commercial Banks and Merchant Banks
Commercial Banks:
(i) Accepting deposits of various types and maturities for the purpose of lending
(ii) Providing working capital finance
(iii) Meeting the short term credit needs of the commercial enterprises
(iv) Allowing customers to withdraw money by cheques
(v) Availing of cash credit, overdraft, discounting of bills of exchange
(vi) Issuing credit cards
(vii) Providing medium-term loans to SSIs or medium scale industry in syndication with the financial institutions etc
Merchant Banks:
Merchant banks offer a number of services incidental to the promotion and development of the industrial projects which include:
(i) Corporate counseling
(ii) Project advisory services like identification, preparation, appraisal and implementation
(iii) Corporate restructuring
(iv) Issue management
(v) Managing mergers/amalgamations and takeovers
(vi) Loan syndication
(vii) Portfolio management
(viii) Corporate advisory services
(ix) Leasing services
(x) Providing assistance for technical and financial collaborations etc
All these services are offered to determine the funds requirements and procuring the same for the client and ensuring their optimum utilization. Thus, advancing loans is not the function to be performed by a merchant bank.
Besides, the different services provided by the two, they differ as to regulatory framework provided for them. Commercial banks are governed by the Banking Regulation Act, 1949 and operate under directives issued by RBI from time to time. They are required to maintain required ratio of liquid assets in the forms of Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) of their time and demand liabilities.
Whereas, there is no regulatory framework on the working of merchant banks. However, merchant bankers are governed by Merchant Bankers Rules issued by Ministry of Finance and Merchant Bankers Regulations issued by SEBI.