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Functions of Merchant Banks

Functions of Merchant Banks

  1. Acting as Issuing Houses in the Capital Market: Merchant banks are engaged in issuing or floating of new securities for private and public companies and for government (state and local) seeking to raise long-term or permanent finance for their projects. For all services involved in the performance of this function, merchant banks receive a commission called brokerage.
  2. Providing foreign exchange services: Merchant banks are authorized dealers in the foreign exchange market and, as a result, they are engaged in the buying and selling of foreign exchange (forex) for commercial and other purposes. They also provide services for both importers and exporters.
  3. Project Financing: The merchant banks are engaged in the financing of new industrial and agricultural projects on the understanding that the repayment would be made from the revenue stream generated by the project.
  4. Equipment Leasing: The business of equipment leasing, as described under commercial banking, is more popular with the merchant banks. Equipment leasing can be in the form of finance lease where a bank provides funds to a firm to purchase the equipment, or operation lease where a bank or lessor buys the equipment and rents it out to the firm i.e. the lessee.
  5. Accepting Deposit: Merchant banks accept large deposits from their customers, mostly corporate bodies. Such deposits attract interest and can be withdrawn only with certificate of deposits (CD) and not with cheques as in the commercial banks’ transactions.
  6. Granting Loans and Advances: The banks provide medium and long-term loans and advances to manufacturers and big-time traders. They are also engage in loan syndication.
  7. Providing Advisory Services: Merchant banks offer advice to their clients on project financing, joint ventures, mergers and acquisitions, debt financing, and on the rationalization of the company’s capital structure.

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