Chapter VI

Development and Investment

Banking
 DEVELOPMENT BANKING
• A development bank is a multipurpose financial
institution with a broad developmental objective.

• Development banks are specialized

financial
institutions that provide financial support and
professional advice (technical support) to
viable
 projects to promote the economic
development
activities of a country.
 Cont….
• It also performs promotional activities in a variety of
ways.

• It renders several services like discovery of investment

projects, preparation of project reports, management
services etc.

• Thus, development banks provide capital, technology and

entrepreneurship.
 Features

• It is a specialized financial institution.

• It provides medium and long-term finance to

business units.

• Unlike commercial banks. It does not accept

deposits from the public.
 Cont…
• It is not just a term-lending institution. It is a multi-
purpose financial institution.
• It is essentially a development-oriented bank. Its primary
object is to promote economic development by promoting
investment and entrepreneurial activity in a developing
economy. It encourages new and small entrepreneurs
and
seeks balanced regional growth.
• It provides financial assistance not only to the private
sector but also to the public sector undertakings.
 Cont…
• It aims at promoting the saving and investment habit in the
community.

• It does not compete with the normal channels of finance,

i.e., finance already made available by the banks and other
conventional financial institutions. Its major role is of a
gap-
filler, i.e., to fill up the deficiencies of the existing financial
facilities.

• Its motive is to serve public interest rather than to make

profits. It works in the general interest of the nation.
 Function of Development Banks
1. Small Scale Industries
• Development banks play an important role in the
promotion and development of the small-
scale
sector.
• Government of the country started Small industries.
• Development Bank of their own country to provide
medium and long-term loans to Small Scale
Industries units.
 Cont…
2. Development of Housing Sector
• Development banks provide finance for
the
development of the housing sector.
• This bank promotes the housing sector in the
following ways:
– It promotes and develops housing and financial
institutions.
– It refinances banks and financial institutions that provide
credit to the housing sector.
 Cont…
3. Large Scale Industries (LSI)
• Development banks promote and develop large-scale
industries (LSI).
• Development financial institutions provide medium
and long-term finance to the corporate sector.
• They provide merchant banking services, such as
preparing project reports, doing feasibility studies,
advising on location of a project, and so on.
 Cont…
4. Agriculture and Rural Development
• Development banks helps in the development of
agriculture.

• It provide credit to the agriculture sector and also for

rural development activities.

5. Enhance Foreign Trade

• Development banks help to promote foreign trade.

 Cont…
6. Entrepreneurship Development

• Many development banks facilitate entrepreneurship

development.

7. Regional Development
• Development banks facilitate rural and regional development.

• They provide finance for starting companies in backward

areas.

• They also help the companies in project management in such

less-developed areas.
 Cont…
8. Contribution to Capital Markets

• Development banks contribute to the growth of

capital markets.

• They invest in equity shares and debentures of

various companies listed in the countries.

• They also invest in mutual funds and facilitate the

growth of capital markets.
 Investment banking
• Investment banking is a type of financial service that focuses
on helping companies, acquire funds and grow their
portfolios.

• Much of this comes in the form of stock and bonds transfer,

but investment capital and wholesale corporate acquisitions
are also part of the equation.

• Bankers within this sector are usually highly trained, and are
widely recognized as some of the most elite participants in
the financial market place.
 Cont…
• They are often required as much for their
consulting and advising services as they are for
actually executing transactions.

• Modern investment banks are made up of three

parts: the corporate business, the sales and
trading business and Market making.
 The Corporate Business
• The corporate side of investment banking is a fee-for
service business; that is, the firm sells its expertise. The
main expertise banks have is in underwriting securities, but
they also sell other services.
• They provide merger and acquisition advice in the form of
prospecting for takeover targets, advising clients about the
price to be offered for these targets, finding financing for
the takeover, and planning takeover tactics or, on the other
side, takeover defenses.
 The Sales and Trading Business
• Investment banks that underwrite securities sell
them on the sales and trading end of their business
to the bank’s institutional investors.
• These investors include mutual funds, pension funds,
and insurance companies.
• Sales and trading also consists of public market
making, trading for clients, and trading on the
investment banking firm’s own account.
 Market making
• It requires that the investment bank act as a dealer in securities,
standing ready to buy and sell, respectively, at wholesale (bid)
and retail (ask) prices.

• The bank makes money on the difference between the bid and
ask price, or the bid-ask spread.

• In addition, investment banks trade securities using their own

fund, which is known as proprietary trading.

• Proprietary trading is riskier for an investment bank than being a

dealer and earning the bid-ask spread, but the rewards can be
commensurably larger.
 Cooperative Banks
• Co-operative banks is an institution established on
the cooperative basis and dealing in ordinary banking
business.

• Like other banks, the co-operative banks collect funds

through shares.

• They accept deposits from the public and grant loans.

• They provide remittance facilities etc.

The End!

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