In the prevailing post-liberalisation scenario, there is every need to strengthen SFCs to enable them to continue discharging their socio-economic obligations.    

State Financial Corporations have been created under the SFCs' Act, 1951 for promoting the growth of small and medium scale industries. Since their inception they have been playing a vital role in furthering the process of industrial development in these sectors in their respective states by meeting the varied financial requirements of entrepreneurs setting up industrial/service enterprises.    

Further, State Level Financial Institutions (SLFIs), comprising SFCs, State Industrial Development Corporations and State Industrial Infrastructure Corporations, which are an integral part of the country's financial system, have been operating effectively at the grass-root level as effective tools for bringing about decentralised economic development through dispersal of industrial activities and means of production, removal of regional imbalance and reduction in income disparities.   

SLFIs have recorded an impressive performance in providing the much needed financial assistance for the promotion and development of small-scale, medium scale and cottage industries in their respective states. As on 31st March, 1997, the cumulative sanctions and disbursements of SFCs/SIDCs aggregated Rs. 39,657.80 crores and Rs. 30,598.40 crores, forming 10.7% and 12.1% respectively of the total sanctions and disbursements made by all financial institutions in the country respectively. Further, they have also played a crucial role in the development of backward areas in their respective states. For instance, upto 31st March, 1997, their cumulative sanctions and disbursements to backward areas aggregated Rs. 18, 109 crores and Rs. 14,945 crores accounting for nearly 48% and 45% respectively of their total sanctions and disbursements. The SFCs alone assisted 6,47,814 industrial units by 31st March, 1997.   

The contribution of small scale sector to the country's economy in terms of employment generation, industrial production, value of exports etc. has been very sizeable and significant. SSI units numbering around 3 million in the country employing around 16.7 million people, account for 40% of the country's aggregate industrial production in the manufacturing sector and 35% of the total exports. Such a performance of the SSI sector has been made possible largely due to the ceaseless efforts of State Financial Corporations in this field. In 1993, a committee was appointed to suggest amendments to the SFCs' Act in order to bring the working of SFCs in tune with the prevailing scenario. Though the committee submitted its report along with its recommendations in May, 1994, no follow- up action seems to have been taken so far on the said report. It may not be an exaggeration to say that with the sea change that has subsequently come about in thinking on functional autonomy of financial institutions and about their privatisation etc., the report and its recommendation have been rendered totally obsolete and outdated.    

In the wake of economic liberalisation and financial sector reforms, the SFCs are facing stiff competition from the commercial banks, which have started extending term loan facilities to the small-scale sector in a big-way. Further, SIDBI, which is a refinancing body operating at the apex level, expected to play a guardian role in promoting SSI sector, is also competing with SFCs in the matter of financing of individual SSIs. The Narasimham Committee on Financial Sector Reforms (1991) made important recommendations with-regard to treatment of income (interest received), asset classification, provisioning and capital adequacy and all these have affected the state financial corporations most. Their overall operations have shown a declining trend during the past two years and their sanctions and disbursements have started showing a negative growth.   

The recovery performance of SFCs at 34% of demand is very low and in some of the SFCS, the situation has assumed alarming proportions with their net worth turning negative, if their owned funds have been eroded to a large extent, it was entirely due to bad debts, resulting from very high risk areas in which SFCs have been operating. This is the price that had to he paid for their involvement in socio-economic development of the backward regions and promoting first generation entrepreneurs and this should not be held against them. No other financial institution could replace the SFCs in their dedication to industrialisation at grass root level with involvement of people of the region.    

Therefore, the need of the hour is to re-capitalise the SFCs and initiate their managerial and financial reconstruction, apart from providing them with access to short-term resources at cost effective rates, to enable them to continue playing their developmental role. The Government of India has been providing fresh capital (already, to the tune of Rs. 20,046 crores source : RBI's report on trend and progress of Banking in India 1997-98) to the nationalised banks where the capital adequacy ratio was inadequate and the banks were saddled with bad debts and other NPAs. In the budget for 1999-2000, a provision of Rs. 180 crores has been made for re-capitalisation of Regional Rural Banks. However, no such gesture has been made so far towards SFCs.    

A study undertaken by SIDBI in 1992-93 indicated that SFCs require just about Rs. 522 crores to attain the minimum capital adequacy norm (8%). This estimate would at the most come to around Rs. 1,000 crores by now. There is no reason that SFCs could not be assisted to bridge this gap, which is much smaller than that in the banking system.    

Equally strong is the case of SFCs for COST effective short-term funds, particularly when refinance support has been reduced considerably. RBI and SIDBI, the apex organisations dealing with promotion, growth and development of small scale industrial units, including co-ordination of SFCs, have to give serious thought to the matter, if the distinct gap, which is being created in the country's financial structure, as a result of weakening of SFCs has to be avoided.  

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