To a finance newbie, banking can appear complex. There are multiple divisions within a bank catering to different segments of customers. It may seem an uphill task to keep up with all of them and understand their functions. One such unique and popular division is investment banking.
Here is your guide to understanding the different aspects of investment banking.
What is investment banking?
Investment banking caters to corporations, governments and High Net Worth Individuals (HNWI). Investment banks provide financial advisory and consulting services to such individuals. They help in raising funds and managing their assets like real estate and debt or equity funds. They assist a firm if it wants to go public or expand via mergers and acquisitions. If a founder wants to sell his firm, they help in finding the right buyer in the market. They also raise funds for a firm if it wants to buy another one. Overall, they serve tailored solutions to their clients.
4 interesting facts about investment banking in India
1. History of investment banking in India - It started in the 19th century with the entry of European banks. These entities entered the country with the prospect of setting trading industries. Subsequently, several foreign investment banks tried to enter and make their mark. However, it was only in 1970 that SBI began its operations in the area. It became the first Indian bank to enter the arena of investment banking.
2. Association of Investment Bankers in India - Investment banking in India witnessed a boom in the 1980s. By the early 1990s, 1500 merchant banks were operating in the country. To provide a standard framework of operations, the Association of Merchant Bankers of India was formed and changed to AIBI in 2010. This regulating body forms guidelines and oversees ethical functioning of these banks. It also promotes the interests of all member organisations.
3. Growth pattern in India- Investment banking has followed a cyclical growth pattern like most industries. After the initial thunderous growth in the 1990s, the industry saw a downturn around 2008. To enter their next phase of growth, investment bankers are expressing interest in going public. Indian companies are also attracting foreign investors as they are achieving scale. Secondly, as the startup culture continues to gain momentum, early-stage businesses are seeking investors. These reasons are pushing investment banking in the right direction. However, regulatory restrictions and tight liquidity are limiting the growth of these banks.
4. Earnings - Investment banks make money by charging their clients in three ways. Firstly, they charge consultation fees for their services. Secondly, they earn interest if they extend a loan to their clients. If they are raising funds from the market, they charge a specific interest of the fund value. Lastly, they earn commission by trading on behalf of their clients.
With the information given above, you can now differentiate an investment bank from a commercial bank. In addition to knowing the differences, you can also understand how they make money as well their growth trajectory in India.