What is Merchant Banking? Merchant banking is an in-house financial service provided by banks to their customers, considering their financial needs for adequate consideration in the form of a fee. It deals with commercial paper, corporate finance, and investment banking services. To provide its customers with better services, the merchant banks collaborate with other financial institutions like mutual funds, insurance companies, and brokerage firms. The merchant bank forms alliances with these institutions to serve their clients better. If the client requires investment advice will advise him and direct them to allied service providers if required.
Features of Merchant Banking:
Before moving further, first, you need to know what merchant banking is. It mainly deals with making loans to and accepting deposits from medium-sized companies. It provides advisory services for private equity, mergers and acquisitions, and capital raising activities. Although merchant banks are an investment or wholesale banks, they differ significantly from other financial institutions regarding business TMT Investment Banking model and operational strategy.
Investment banking is not a regulated activity in most jurisdictions worldwide. Thus it can be conducted by any company or person registering as an investment bank. Merchant Banking, in some jurisdictions, also known as investment banks, refers to a division of finance. Merchant banks conduct both corporate finance and capital markets activities. Capital markets involve assisting corporations to raise funds through debt and equity issuance and trading these securities on a stock exchange.
Merchant Banking may act as an underwriter during an IPO or participate in other security issues such as bond sales, project financing, merger & acquisition activity, and secondary share trading. They can also advise on company management reorganization or restructuring processes and offer services such as mergers & acquisitions advisory, legal, due diligence services, and technical consulting work for public-private partnerships projects.
Types of Merchant Banking:
Merchant banking is an investment banks term that refers to originating, selling, and financing loans. Most banks focus on making corporate loans and managing risk rather than placing proprietary capital at risk, as is more common in traditional investment banking. However, Merchant Bank is also sometimes used by large firms or governments to raise capital. Most merchant banks sell their loans to institutional investors, such as pension funds or insurance companies.
All lenders have underwriting standards. Some reject almost all loan applications, while others consider almost every application they receive. A commercial bank makes loans based on an evaluation of a company’s creditworthiness and financial stability, assessing its ability to repay a loan through its business activities and cash flow. What is Merchant Banking, and what are the types of it? Merchant banks are financial institutions that extend short-term credit to companies in exchange for a fee or commission. They buy loans from banks, insurance companies, and large businesses.
It helps other lenders by providing them with high-quality loans to sell on their books. They also invest in mortgage-backed securities and collateralized debt obligations, pooled groups of asset-backed securities. These investments increase their ability to originate new loans with lower default rates because they diversify risk across numerous borrowers instead of relying on just one borrower’s business success or failure to pay back a loan.
Ethics and Rules Associated with Merchant Banking:
Corporate finance is a new banking system. If you are involved in Merchant Banking, you will have to deal with several legal documents. Like share certificates and securities that these banks use. There are several laws governing merchant banks. So one must be familiar with them if they wish to participate. If you are planning to become a banker or want to work for a bank, there are certain things you need to know about merchant banking.
What is Merchant Banking? How does Merchant Bank differ from Commercial Banks? What do we mean when we say Merchant Banker and Corporate Finance? What is Merchant Banking all about? Who needs Merchant Banks & Why? How do Merchants Banks make money & what products/services do they offer? How does one set up a successful merchant bank business model in India today, and what opportunities exist for budding entrepreneurs who want to venture into such business models?