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Difficulty: HardMerchant, Development, and Specialized Banks

A large domestic manufacturing enterprise seeking to establish a new processing plant requires long-term credit facilities extended at concessionary interest rates, paired with technical advisory services for project implementation, rather than underwriting services or short-term working capital. Which financial institution is structurally mandated to provide these specific services?

  1. A
    Commercial bank
  2. B
    Merchant bank
  3. Development bankAnswer
  4. D
    Central bank

Answer

Development banks are the financial institutions specifically mandated to offer long-term financing at subsidized/concessionary rates along with technical project management assistance.
Development banks are specialized financial institutions established specifically to bridge long-term funding gaps in critical growth sectors (such as manufacturing, agriculture, and infrastructure). They provide long-term loans at below-market/concessionary interest rates accompanied by project appraisal and technical guidance.

Step-by-Step Solution

1
Analyze the financial requirements of the enterprise described in the stem.
The firm requires long-term credit, concessionary (subsidized) interest rates, and specialized technical/advisory support for industrial capital project creation.
Identifying the target features (loan maturity, interest concessions, and technical advice) narrows down the institutional mandate.
2
Compare the requirements against institutional functions.
Merchant banks handle wholesale corporate services and capital market underwriting at market rates; Commercial banks deal in short/medium-term retail loans; Central banks act as apex regulators; Development banks (e.g., Bank of Industry, Bank of Agriculture) focus explicitly on long-term sectoral development and concessional financing.
Only development financial institutions match the dual mandate of long-term subsidized development capital and technical advisory.

Key Concept

Distinctive Functions of Development Banks vs. Merchant and Commercial Banks
Estimated Time:1m 15s
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Topics

Merchant, Development, and Specialized Banks

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