THE STATE FINANCIAL CORPORATION ACT, 1951 :
WANTED REPLACEMENT AND NOT MERE AMENDMENT

Nearly fifty years ago, the State Financial Corporations (SFC) Act come into being on October 31, 1951. The then legislators had wisely thought that the newly independent country-full of hope and optimism - urgently needed an accelerated pace of development to clear the backlog of centuries of under - development and put the country on the path of self - sustained development. As a result, very soon after attaining independence, the Industrial Finance Corporation Act, 1948 (XV of 1948) was enacted to provide medium and long-term credit to the industrial undertaking which fell outside the scope of the commercial banks. 

The Centre thus established the Industrial Finance Corporation of India (IFCI). In their turn, the states also felt that they should have similar corporations in their states to finance medium and small scale industries which fell outside the scope of the newly established Indian Finance Corporation of India (which has now been converted into a company). The SFCs Act was the result. These institutions - the IFCI and the SFCs - came into being on the clear realisation that external financing as distinct from self - finance, alone can stimulate economic growth in the country. 

In the developed countries like Canada and the United States there is a very healthy practice of sunset legislation. Under this practice, every piece of legislation is systematically reviewed to see if the objective, for which a particular piece of legislation was enacted have been met or not, whether it was necessary to continue to have the legislation, or whether some amendments were required. In the United States, Senator Kevin Brady has proposed the Federal Agency Sunset Review Act of 1998 (http://www.house.qov/brady/sunset- overview.htm1). A similar law is used in 20 states in the United States including Texas, which had eliminated 23 agencies. In India no such practice is in vogue. 

Time has come now to review the SFCs Act in its entirety, including its structure, for two reasons. First, the economic scene is changing very fast in India as well as all over the world. Very powerful forces of liberalisation, globalisation, and economic reforms have been set into motion. As a result both capitalism and statism are under attack and undergoing rapid transformation. The rise of multi-national coporations and emergence of the Internet have made the situation more complex and unprecedented. Secondly, the period of nearly fifty years is, by itself, good enough warranting a total review of the statuette

The first question to ask is, and it is a basic question : Do we still require the SFCs after nearly fifty years of their existence ? The idea behind the question is that, if the SFCs are no longer required, they should be wound up. And if the SFCs are still required, then they should be properly looked after. The unbiased objective answer to the question is a resounding yes. Why? Because there is no other financial institution which can reach people at the grass-roots level. Moreover, the mandate of the SFCs is entrepreneurial development, And there is no other institution except the SFCs to support it in the states.

If that be so, what can be done to support the SFCs? A lot. Consider, first, that the SFCs, by their very designation, are financial institutions. Why then is there any restriction on their financial activities? A citizen has a number of needs for finance, for example, for housing, transport, and insurance. A citizen also has a sense of ownership over SFCs being public institutions from which, by virtue of being a citizen, he can, and should demand the specified services. He feels let down when he is told that such activities are not covered by the SFCs. If the intention is to meet the financial requirements of a citizen, then SFCs are required to be made general purpose omnibus financial institutions not confined to industrial activities alone. 

This is all the more necessary as States differ greatly in their natural resource endowments. Take, for example, the case of two north-eastern States - Meghalaya and Arunachal Pradesh. If horticulture is well - established in Meghlaya and it has tremendous potential in Arunachal Pradesh, why SFCs cannot finance horticultural projects? Take another case of Haryana. If cold storages are crying needs of Haryana, why Haryana SFC cannot finance them ? They cannot because the SFCs Act does not permit them to do so, As a result the genuine, felt needs of the people are not met. 

Also, the definition of industry has also been undergoing change, as it should, during last fifty years. It is no longer confined to manufacturing. As the economy develops, it moves, in importance as reflected in the share in the gross domestic product (GDP), from agriculture to industry to services. How does one look after the services sector? The SFCs should be allowed to meet the increasing requirements of the services sector. And what about the requirements of the emerging information technology (IT) and biotechnology sectors? Should SFCs ignore them ? Certainly not. Then there ought to be enabling provisions in the SFCs Act. 

As the Indian economy has been developing during past five decades, need has been felt for better, fine-tuned, financing instruments. What do the SFCs offer? Only one instrument, namely, the loans. And every one known that a loan is a handicapped instrument as it requires securities and collaterals. Howsoever sound the project may be, no first-generation entrepreneur can provide these. For him, thus, the doors of SFCs are shut. Should they? No. Then, again there should be enabling provisions in the SFC Act for angel funding, venture funding, and so on. 

These are some of the thoughts which readily occur to mind on the vital issue of proposed amendment of the SFCs Act, 1951. 

The Act was last amended in 1985 and never comprehensively. Treating it as an issue of utmost importance, the Council has already held elaborate deliberations on the subject and submitted a detailed memorandum (see last issue of Cosidici Courier) to Special Secretary (Banking), Ministry of Finance, Government of India when a COSIDICI delegation called on him on December 12, 1999. We are grateful to him for deputing Joint Secretary (Banking) to explain the proposed amendments in COSIDICI Executive Committee meeting held on January 8, 2000 in Mysore. Matter is now under consideration of the Banking Division. 

Hopefully, the proposed amendment of the SFC Act would enable the SFCs to become premier State level financial institutions this very year, removing the existing anomalies in the Act and equipping the SFCs to face the challenges of the 21st Century with confidence, resilience, and most importantly, service to the clients.

D.C. Misra