Merchant Bank: Overview India Dictionary

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3.102 The need to direct credit according to the plan priorities led to various micro controls which took the form of specifications regarding sectoral deployment of credit and setting of interest rates for deposits and loans. In order to garner resources for growth, it was felt that the banking system should play a key role in mobilising deposits. While the spread of bank branch network helped to some extent, the deposit interest rate, it was believed, had to be attractive for such effort to be successful. While the lending rate for the priority borrowers was at a concessional rate, the rates to the non-priority borrowers increased due to cross-subsidisation. A ceiling rate on export credit was also prescribed in March 1968 to encourage the flow of credit to the sector.

In fact, credit growth to agriculture during the 1990s slowed down to almost one-half as compared with the 1980s. The decline in the share of agriculture in capital formation relative to its share in real GDP in the late 1990s and the early 2000 was a cause of concern exacerbated by the decline in credit-deposit ratio of the rural branches of SCBs. Additionally, several SCBs reported shortfalls in lending to the priority sector, including agriculture. The Government and the Reserve Bank, therefore, took several measures to increase the flow of credit to agriculture. 3.137 The various measures initiated had a favourable impact on the quality of banks’ balance-sheets. In a short span, banks were able to bring down their non-performing assets significantly.

3.99 The Differential Rate of Interest Scheme was modified to allow sponsor banks to route the DRI advances through RRBs on a refinance basis, in addition to the routing of such advances on an agency basis. The refinance to RRBs carried a rate of interest at 2 per cent per annum and the amount of refinance so provided was taken into account by sponsoring banks for the purpose of the target of 1 per cent of the lendings under the scheme. 3.53 The process of strengthening of the banking sector also took the form of weeding out the unviablebanks by liquidation or the taking of the assets of the non-functioning banks by other banks. Of these, 73 banks went into voluntary liquidation and 33 went into compulsory liquidation. 3.43 The partition of the country hurt the domestic economy, and the banking sector was no different. Of the 84 banks operating in the country in the organised sector before partition, two banks were left in Pakistan.

Thus the second principal ingredient of Merchant Banking became and still is raising of capital through the issue of stocks and bonds. More recently, the services offered by Merchant Banks have entered into the other areas of operations. Their role is wide ranging and they can now provide most of the financial services required by a company, touching almost all aspects of establishing and running of industrial units on sound financial footing. The term Merchant Banking has its origin in the trading methods of countries in the late eighteenth and early nineteenth century when trade-taking place was financed by bill of exchange drawn by merchanting houses. As international trade grew and other lesser- known names wanted to import goods from abroad, the established merchants ‘lent their names’ to the newcomers by agreeing to accept bills of exchange on their behalf.

3.98 It was felt that this was mainly because commercial banks were not tuned to the needs and requirements of small and marginal farmers, while the co-operatives lacked resources to meet the expected demand. The need, therefore, was felt of a separate banking structure, capable of combining the local feel and familiarity of rural problems characteristic of co-operatives and the professionalism and large resource base of commercial banks. While the idea of starting rural banks was first suggested by the Banking Commission , action along these lines was initiated after the ‘Twenty Point Programme’ or ‘New Economic Programme’ of the Government of India launched in the mid-1970s. The Regional Rural Banks Ordinance was promulgated on September 26, 1975, which was subsequently replaced by the Regional Rural Banks Act on February 9, 1976. They were expected to ‘combine the rural touch and local feel with the modern business organisation’. 3.29 The central bank, if it is a supervisory authority must have sufficient powers to carry out its functions, such as audit and inspection to be able to detect and restrain unsound practices and suggest corrective measures like revoking or denying licences.

Given the significance of both the sectors, concerted efforts were made by the Government and the Reserve Bank to increase the flow of credit to these sectors. As a result, the decelerating trend of lending to agriculture and SMEs by banks was reversed. Sharp increase in credit to agriculture led to sharp increase in credit intensity of agriculture. The restructuring of RRBs by merging them sponsor bank-wise at the state level made them larger and stronger to serve as a better instrument of rural credit delivery.

Banks were also constrained in their operations due to restrictions on opening or closing of branches on the basis of their commercial judgment. One of the major objectives of reforms was to bring in greater efficiency by permitting entry of private sector banks, liberalise licensing of more branches of foreign banks and the entry of new foreign banks and increased operational flexibility to banks. Keeping these in view, several measures were initiated to infuse competition in the banking sector. 3.79 On the eve of independence, the banking system was concentrated primarily in the urban and metropolitan areas. During the early independence period, the efforts were made to spread banking to rural and neglected areas, especially through the State Bank of India and through the branch licensing policy. This rise was mainly on account of rise in the number of branches of scheduled commercial banks that rose from 2647 offices in 1951 to 6816 offices in 1967.

Fortunately, for the Indian economy, quick action was taken to address these issues. Both these Indian service provider bankers emerged as leaders in service provider banking having done vital business through the interval of compared to overseas banks. The early and mid-seventies witnessed a boom within the development of merchant banking organizations within the country with numerous commercial banks, financial establishments, and broker’s firms coming into in to the sector of merchant banking.

What is merchant banking and its function?

The plethora of compulsions on the banking sector translated into a complex set of micro regulations and led to financial repression. This dirigiste approach to economic management led to crowding out of private enterprises as the increasing share of credit flows was mopped up by the Government and public enterprises. Moreover, these quasi-fiscal policies gradually affected commercial banks’ formal merchant banking activities in india was originated in balance sheets by affecting their profitability. Decline in profitability and increase in NPLs also impacted the soundness of the banking sector as banks were unable to plough back their profits as detailed in the subsequent sections. 3.95 The definition of the priority sector was formalised in the 1972, although initially there were no specific targets in priority sector lending.

  • The rising deficit and the accompanying inflation led to an administered structure of interest rates and several other micro controls.
  • As a result of the concerted efforts and policies of the Reserve Bank, a well-differentiated structure of credit institutions for purveying credit to agriculture and allied activities emerged.
  • Prior to the initiation of new policy, branch licenses were granted primarily on the basis of the financial position of banks.
  • With the passage of time the practices in developed and the service provider banking within the trendy period started from London the place the retailers began to finance the foreign trade through acceptance of bill.

Lead merchant banker should advice the issuer to enter into ‐‐‐‐‐‐‐‐ with a particular intermediary for the purpose of issue management. In India, the functions of the merchant bankers are governed by the Securities and Exchange Board of India Regulations, 1992. • In order to strengthen the capital base of banks, the capital to risk-weighted assets ratio for banks was raised to 9 per cent from 8 per cent, from year ended March 31, 2000. • Rationalisation of lending interest rates was undertaken begining April 1993, initially by simplifying the interest rate stipulations and the number of slabs and later by deregulation of interest rates.

The Presidency banks issued currency notes until the enactment of the Paper Currency Act, 1861, when this right to issue currency notes by the Presidency banks was abolished and that function was entrusted to the Government. MERCHANT BANKER 3 DEFINITION The first authoritative definition for the time period ‘Merchant Banker’ has been given in the Rule 2 of SEBI Rules, 1922. Sec/5 of the Banking Regulation Act, 1949 defines Banking as “Accepting, for the purpose of lending or investment of deposits of money from the general public, repayable on demand or in any other case and withdrawable by cheque, draft, and order or otherwise”. It supplies consultancy to its clients for financial, advertising, managerial and authorized matters. A merchant bank is a company that conducts underwriting, loan services, financial advising, and fundraising services for large corporations and high net worth individuals.

Merchant Bank: Overview

Further, such mergers would have gone against the spirit of setting up of RRBs as local entities and for providing credit primarily to weaker sections. 3.192 The Reserve Bank initiated several other measures to increase the flow of credit to the agriculture sector. In addition, the Reserve Bank also aligned repayment dates with harvesting of crops by treating loans granted for short duration crops as an NPA, if the instalment of the principal or interest thereon remained unpaid for two crop seasons beyond the due date. Loans granted for long duration crops were treated as NPAs only if the instalment of the principal or interest thereon remained unpaid for one crop season beyond the due date. 3.176 In consultation with the Government of India, the Reserve Bank released the roadmap for the presence of foreign banks in India on February 28, 2005. In terms of the two stages envisaged in the roadmap, the roadmap in the second stage is due for review in April 2009.

It was recognised that cost of credit, rather than access, was the key constraint facing the rural poor. The policy was to free the vulnerable rural population from the local moneylenders by enhancing the spread of organised credit. The results of nationalisation of banks and introduction of directed credit programmes and other initiatives were extremely encouraging.

formal merchant banking activities in india was originated in

Of the total household savings, 89 per cent were in physical assets.16 Financial savings flowed in greater measure to the postal department that was considered a safer avenue due to government ownership. Bank deposits mobilised by commercial banks were largely lent out to security based borrowers in trade and industry. 3.28 Some promotional role was envisaged for the Reserve Bank from the very beginning as agricultural credit was a special responsibility of the Reserve Bank in terms of the RBI Act. The Reserve Bank assumed a proactive role in the sphere of agricultural credit for the economy and took concrete action by commissioning two studies in 1936 and 1937 in this area. Almost the entire finance required by agriculture at that time was supplied by moneylenders; cooperatives and other agencies played a negligible part . During the period from 1935 to 1950, the Reserve Bank continued to focus on agricultural credit by fostering the co-operative credit movement through the provision of financial accommodation to co-operatives.

Types of Merchant Banks in India

3.177 The branch authorisation policy was also liberalised and rationalised in September 2005 in order to give reasonable freedom to banks and rationalise the policy for opening of new branches in India. The system of granting authorisation for opening individual branches from time to time was replaced by a system of giving aggregated approvals, on an annual basis, through a consultative and interactive process. The revised branch authorisation policy granted reasonable flexibility and freedom to banks in matters relating to shifting, conversion of branches and upgradation of extension counters . 3.132 The tentative provisioning required by banks was estimated at around Rs.10,000 crore by the Reserve Bank. Further, banks also required additional resources to meet the capital adequacy norms. Of this, the banks were able to provide about Rs.4,000 crore from their own surplus generation over a two-year period and about Rs.10,000 crore were required by the system as additional resources.

formal merchant banking activities in india was originated in

3.124 Large branch expansion also resulted in increase in deposits and credit of the banking system from 13 and 10 per cent of GDP, respectively, in 1969 to 38 per cent and 24 per cent, respectively, by 1991. New branches opened helped considerably in deposit mobilisation and the evidence suggested that of the incremental deposits a large proportion was from the branches opened after 1969. The share of rural deposits in total deposits increased from 3 per cent in 1969 to 16 per cent in 1990.

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The banks had a role to play in the area of providing financial education to their customers, as timely counselling of the borrowers could have positive impact on the asset quality of the banks. Various initiatives by the Reserve Bank led to qualitative improvement in customer service. 3.197 A number of policy initiatives were also undertaken to facilitate the diversification of RRBs business operation into new areas.

However, credit to the SME sector decelerated in the 1990s (8.1 per cent as compared with 20.7 per cent in the 1980s) and the first four years of the current decade. Realising the critical role of small industries in the economy, the Reserve Bank initiated several measures with a view to increasing the flow of credit to Small Scale Industry units. Besides, in pursuance of the recommendations made by several working groups and high powered committees appointed by the Central Government and the Reserve Bank, a set of comprehensive guidelines to be followed for advances to all categories of borrowers in the SSI sector was evolved. 3.175 During this phase, some more measures were undertaken to strengthen the competitive environment. With liberalisation of the FDI regime, FDI in the banking sector was brought under the automatic route. However, the FII investment limit could not exceed 49 per cent within the aggregate foreign investment ceiling of 74 per cent of the paid up capital and at all times, at least 26 per cent of the paid-up capital, was required to be held by residents.

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