Merchant banking is a much desired innovative step undertaken by the commercial banks in India.
The need for merchant banking was vehemently stressed by the Banking Commission (1972).
According to the commission, merchant banking institutions are to offer services like syndication of financing, promotion of projects, investment management and advisory services to medium and small savers and to provide funds and trusts to various types. In fact, merchant banking implies a wider range of specialist services, such as:
(i) Loan syndication,
(ii) Financial and management consultancy,
(iii) Project counselling,
(iv) Portfolio management,
(v) Formulation of schemes of rehabilitation,
(vi) Guidance on foreign trade financing,
(vii) Guidance to non-resident Indians for investment in India.
The National & Grindlays Banks was the first to introduce merchant banking services in 1967, followed by the First National City Bank in 1970.
Among the Indian banks, however, the State Bank of India is the pioneer in starting Merchant Banking Division in 1972. Other public sector banks such as the Bank of Baroda, Canara Bank, Bank of India, UCO Bank etc., entered into merchant banking in the late seventies and early eighties.
Fundamentally, merchant banking division is regarded as a project-evaluation instrument.
It provides expert knowledge and help in the floatation of new companies, the preparation, planning and execution of new projects, and the management and promotion of industrial enterprises as well as their financing. Basically, however, merchant banks are more service-oriented.
Their main function is to guide the preparation, planning, evaluation and execution of projects which are helpful to the growth of industries.
In specific terms, however, the main function assumed by the merchant banking division of the National & Grindlays Bank are as under:
(i) To give advice and assistance to entrepreneurs in planning their finances.
(ii) To match the needs of the customer for all types of finance with available resources for such finances, national or international.
(iii) To act as an intermediary and expert for advising and assisting in raising share capital or loan capital.
(iv) To assist customers in long-range planning for growth and effectiveness.
(u) To promote international investment.
(vi) To provide specialised services and assistance to small and medium-sized industries, as well as to the joint sector industries.
Similarly, the following functions have been specified for the merchant banking division of State Bank of India.
(a) To furnish advice, assist and liaison in meeting with allied government formalities, required in establishing or expanding industrial projects.
(b) To prepare economic, technical and financial feasibility reports and survey reports for setting up new industrial projects.
(c) To render assistance in raising rupee loans from term lending institutions, development banks, commercial banks and such other institutions.
(d) To give assistance in raising foreign exchange resources.
(e) To provide assistance and advice in determining the capital structure, in obtaining official consent and in handling and floating capital issues and such other activities as are engaged in by the registrars or issues houses.
(f) To advise and assist in restructuring of capital, amalgamation, mergers, etc.
(g) To advise and assist in adopting the best form of industrial organisation.
(h) To help in financing foreign trade.
In general, however, the merchant banking activities of the Indian banks have been largely confined to the management of public issues and loan syndications.
They have yet to develop expertise in the fields of projects counseling, corporate counseling, capital restructuring, portfolio management, etc.
The Indian merchant bankers pay little attention to the problem of industrial sickness or the growth of small scale industrial units.