DEVELOPMENT FINANCE

BY AR POOJA POPLY
 National and international development finance institutions (DFIs) are specialized
development banks or subsidiaries set up to support private sector development in
developing countries.
 They are usually majority-owned by national governments and source their capital from
national or international development funds or benefit from government guarantees.
 This ensures their creditworthiness, which enables them to raise large amounts of money
on international capital markets and provide financing on very competitive terms.
 The development finance institutions or development finance companies are
organizations owned by the government or charitable institution to provide funds for low-
capital projects or where their borrowers are unable to get it from commercial
lenders. Development finance institutions (DFIs) occupy an intermediary space between
public aid and private investment, facilitating international capital flows.
 Types of Finance provided are –
• Medium (1 – 5 years) and
• Long term ( >5 years).

DEVELOPMENT FINANCE INSTITUTIONS

• The prime objective of DFI is the economic development of the country
• These banks provide financial as well as the technical support to various sectors
• DFIs do not accept deposits from people
• They raise funds by borrowing funds from governments and by selling their bonds to
the general public
• It also provides a guarantee to banks on behalf of companies and subscriptions to
shares, debentures, etc.
• Enables firms to raise funds from the public. Underwriting a financial institution
guarantees to purchase a certain percentage of shares of a company that is issuing IPO
if it is not subscribed by the Public.
• They also provide technical assistance like Project Report, Viability study, and
consultancy services.

OBJECTIVES OF DEVELOPMENT FINANCE

INSTITUTIONS
Industry
 IFCI – 1st DFI in India. Industrial Corporation of India was established in 1948.
 ICICI – Industrial Credit and Investment Corporation of India Limited established in 1955
by an initiative of the World Bank.
• It established its subsidiary company ICICI Bank limited in 1994.
• In 2002, ICICI limited was merged into ICICI Bank Limited making it the first universal bank of the
country.
 Universal Bank – Any Financial institution performing the function of Commercial Bank + DFI
• It was established in the private sector and is still the Only DFI in the private sector.
 IDBI – Industrial Development Bank of India was set up in 1964 under RBI and was granted
autonomy in 1976
• It is responsible for ensuring adequate flow of credit to various sectors
• It was converted into a Universal Bank in 2003
 IRCI – Industrial Reconstruction Corporation of India was set up in 1971.
• It was set up to revive weak units and provide financial & technical assistance.
 SIDBI – Small Industries development bank of India was established in 1989.
• Was established as a subsidiary of IDBI
• It was granted autonomy in 1998
SOME IMPORTANT DFIS (SECTOR SPECIFIC)
Foreign Trade
 EXIM Bank – Export-Import Bank was established in January 1982
and is the apex institution in the area of foreign trade investment.
• Provides technical assistance and loan to exporters
Agriculture Sector
 NABARD – National Bank for agriculture and rural development
was established in July 1982
• It was established on the recommendation of the Shivraman Committee
• It is the apex institution in the area of agriculture and rural sectors
• It functions as a refinancing institution
Housing
 NHB- National Housing Bank was established in 1988.
• It is the apex institution in Housing Finance
 Development finance is the efforts of local communities to support, encourage
and catalyze expansion through public and private investment in physical
development, redevelopment and/or business and industry.
 It is the act of contributing to a project or deal that causes that project or deal to
materialize in a manner that benefits the long-term health of the community.
 Development finance requires programs and solutions to challenges that the
local business, industry, real estate and environment creates.
 There are dozens of terms within the development finance industry including
debt, equity, loans, bonds, credits, liabilities, remediation, guarantees,
collateral, credit enhancement, venture/seed capital, angels, short-term, long-
term, incentives, and gap financing.

UNDERSTANDING DEVELOPMENT FINANCE

BREAKING DOWN DEVELOPMENT FINANCE
 Government projects are exactly what they sound like – roads, bridges, sewers,
water facilities, schools, airports, docks, parking garages, broadband, utilities, etc.
 Established industry represents our industrial, office and retail sectors (depending
on location). Examples such as industrial parks, manufacturing, tech/research hubs
and commercial retail centers fall within this category.

 Development and redevelopment consists of the projects that require major

public resource commitments to catalyze new private sector development. We see this
throughout the country with urban revitalization, rural rejuvenation, adaptive reuse,
brownfield development and other transformative projects that require significant
public capital.

 Small Business and Micro-Enterprises are pretty self-explanatory as well. These

projects represent our economic engine locally. Generally, a small business is defined
as any company with less than 500 employees and a micro-enterprise is any company
with fewer than five employees.

 Entrepreneurs represents our future businesses. These are one-two person

companies that are working through the early stages of the business life cycle.
Typically, entrepreneurs are not ready for traditional financing and need a unique
approach to help them find the working capital needed to expand and grow.
 Bedrock Tools: This is the large debt market generally known as bonds and
makes up the foundation of all public finance. bonds are issued nationwide annually
representing infrastructure, housing, education, development, non-profits, healthcare
and manufacturing.
 Targeted Tools: These tools target geographic areas through the use of tax
increment finance, special assessment districts, government assessment districts,
project specific district tools and tax abatements.
 Investment Tools: These tools encourage private sector investment in
projects and businesses through tools such as tax credits and the EB-5 investor
program.
 Access to Capital Lending Tools: These tools, such as revolving loan funds,
mezzanine funds, loan guarantees and microenterprise, seed & venture capital
financing programs, etc. represent the resources for supporting small business access
to capital on a broad scale.
 Support Tools: Finally, support tools represent our large funding resources
provided by the government.

TOOLS USED
 Development finance agencies (DFAs) can be either public or quasi-
public/private authorities that provide or otherwise support
economic development through various direct and indirect financing
programs.
 DFAs may issue tax-exempt and taxable bonds, provide credit
enhancement programs, and offer direct lending, equity
investments, or a broad range of access to capital financing
mechanisms.
 DFAs can be formed at the state, county, township, borough or
municipal level and often times have the authority to provide
development finance programs across multi-jurisdictional
boundaries.
WHAT IS A DEVELOPMENT FINANCE AGENCY
(DFA)
Examples of development finance agencies include:
• Industrial development authorities, boards or corporations
• Economic development authorities, corporations or councils
• Special purpose authorities (port, transportation, parking,
development, energy, air, water, infrastructure, cultural, arts,
tourism, special assessment, education, parks, healthcare, facility,
etc.)
• Local and community development authorities, corporations or
institutions
• Departments of development or commerce and finance authorities,
divisions, or departments within state and local government
• Business development corporations, centers or districts
• Development and redevelopment authorities, commissions or
districts
 Development finance is a niche in the finance market that
can be arranged through high-street banks, non-banks and
specialist lenders.
 Each loan is tailored to the developer’s project and building
schedule, with a repayment term depending on the
projected completion date (typically between 9 and 36
months).
 Lenders will take the time to understand the development
in detail, and organise the finance accordingly..

WHY IS DEVELOPMENT FINANCE IMPORTANT?

 The importance of development finance becomes evident in how the loan is
paid out.
 Since property development happens in stages, development finance is
paid in stages too.
 Phase one contributes towards the acquisition of the land/site and
phase two is the construction finance.
 The second phase is allocated in segments, or tranches, at key points
throughout construction.
 This scheduled pay-out ensures appropriate funding is available when
needed but also avoids funds being ‘drawn down’ to sit unused in the bank
accumulating interest charges.
 Essentially, anyone that needs funding for the construction,
conversion or refurbishment of property as a business
enterprise (to make a profitable sale or rental income).
 How developers finance the scheme varies, but ultimately they
source the funding and contribute the equity.
 Small-scale developments could potentially be funded using
capital.

WHO USES DEVELOPMENT FINANCE?

 Applying for development finance can be a complex process
 For any application, a developer needs a presentation that sells their project
vision and makes a lender confident to invest. It should include the following:
 Overview - highlights the developer’s ability to complete the scheme,
shareholder information, how the deposit was raised and exit strategy details.
 Developer CV
• development experience
• completed projects
• type of projects
• experience prior to property developing
• professional qualifications

WHAT PAPERWORK DO I NEED TO PRODUCE

FOR DEVELOPMENT FINANCE?
 Development Appraisal – the main chunk of the presentation, detailing the
project to the last brick;
 Site/property address, purchase price, purchase costs (stamp duty etc.)
 Itemized costing of the main building contractor, building control,
planning and architect
 Contingency costs, usually between 7.5-10%
 Property schedule – a comprehensive list of all property units being built,
with specific details and sizes on each
 Comparables – a thorough analysis of similar properties that have sold
nearby within the last six months. Selling prices become less relevant
beyond six months.