State Financial Corporations (SFCs) were set up pursuant to the SFCs Act, 1951 (an Act of parliament) to cater to the needs of the medium/small scale industries. They have come a long way since then. During 1997-98, the total loans sanctioned by SFCs amounted to Rs. 3,000 crores and their disbursement to Rs. 2,300 crores. Their loans outstanding as on 31.3.1998 stood at Rs. 11,500 crores. The cumulative assets of SFCs are in excess of Rs. 14,000 crores and the capital amounts to approx. Rs. 1,200 crores. These figures give an idea about the growing proportion of SFCs' business.   

With the opening up of the economy and the initiation of financial sector reforms since 1991, SFCs have to work now in a competitive environment. As a result, they have to cope up now with a new set of challenges. The stringent provisioning norms and capital adequacy stipulations have already affected the bottomline of the SFCs. Their NPA level is almost 43%. Out of 18 SFCs in the country, only 6 SFCs show Capital Adequacy Ratio (CAR) of prescribed minimum of 8 per cent and above as on 31.3.1998. CAR of 4 of them is below the prescribed minimum and of as many as 8, it is negative.   

It was in this background the Kerala Financial Corporation organised a seminal on preparing SFCs for the next millenmium" on April 19-20, 1999 at Mascot Hotel, Thiruvananthapuram. It was Cosponsored by IDBI and SIDBI. Venture Capital Activity, Infrastructure Financing, ISO Certification for providers of financial services, pruning of NPAs and diversification of activities of SFCs were the topics discussed. The deliberations were attended by more than 40 participants from SFCs, SIDCs, CRISIL, SIDBI, IDBI, ICICI, Canbank VCF, Consultants and others.   

The seminar was inaugurated by Shri Jagdish Capoor, Dy. Governor, RBI. In his inaugural address, Shri Capoor emphasised the need for adequate capitalisation of SFCs and focussing attention on quality rather than on quantity. He observed that over a period the role of Development Finance Institutions is undergoing a change and there has been a gradual blurring of boundaries for business between term lending institutions and banks in the last few ears. Thus the role of SFCs will be going through a process of evolution in the next millennium. There will be challenges to meet as the competition becomes acute and the SFCs will have to gear themselves for it. Althrough the SFCs progress in extending financial assistance has been significant they may have their share of shortcomings. Looking to their clientele the appraisal exercise is crucial and the SFCs' need to see how best they can improve these skills and how best they can make use of various tools available elsewhere. Deliberate non-payment of dues despite an adequate cash flow or wilful default is another bane of the system. This is a matter of great concern particularly to SFCs where the level of NPAs is higher. Infrastructure development is the key to overall social and economic development. Till recently this used to be within the exclusive domain of the State mainly due to the large fund equiments, long gestation periods, non-quantifiable benefits etc. But there are certain types of infrastructural projects which could pass the muster of viability as is appreciated by financing institutions. However, the projects involve large outlay and may involve more than one financial institution. These projects are often financed through Special Purpose Vehicles (SPVs) and are structured on a limited/non-recourse basis. Financing of such projects requires special skill on the part of lending institutions for identifying various elements of project risks and evaluating the same and monitoring the implementation.   

The first business session on Venture Capital activity was chaired by Shri S. Suryanarayanan, CGM, IDBI, Chennai. Shri Rakesh Rewari, General Manager, VCF Department, SIDBI, Mumbai and Shri T. Bhagwandas, M.D., Canbank Venture Capital Fund Ltd. Bangalore presented papers. While Shri Rewari touched upon the philosophical aspects, Shri Bhagwandas convered the brasstacks. The structure of VCF, regulatory framework requirments, its relevance for SFCs and SIDCs, investment and disinvestment methodology, stages of investment, legal framework, tax issues, SEBI registration etc. were discussed in detail. It was emphasised that the objective of the venture capitalist should be to maximise upside potential rather than minimising down side risk. Considering the very risk involved in the venture capital activity, the Fund must be structured cautiously and a two tier structure comprising the Trust and the Asset Management Company (AMC) would he ideal for this purpose. The investment decisions must be left to a through professional heading the AMC, a person who knows business and who should be there on long term basis and whose remuneration should be linked to the sucess rate of the investee companies.   

The second business session was chaired by Shri L.S.M. Salins, Managing Director of Haryana Financial Corporation. Shri Shekhar Damle, Senior Vice-President, ICICI Ltd., Mumbai presented a paper on 'Infrastructure Funding and Risk Analysis of Projects.' Several concepts such as BOO, BOOT, BOLT, BOT, BOST, LDO Lease-Develop-Operate) were explained. Infrastructure projects involve massive investments and long gestation period. Security aspect has no relevance. One has to rely on cas flows only. SFCs have their own limitations (CAp on project size being just on of them). This is a new area. But if project is structured well, risk is reduced. Even  projects of big size could be structured by SFCs for competitive bidding and the cost incurred towards them, can be built into the project as equity loan by the SFC. In such cases, the role of SFC will be akin to that played by a venture capitalist. All in all, there is sufficient ground for SFCs to make a beginning in the direction of infrastructure financing. APSFC has already done so by participating in a road project structure on BOT basis.   

The next session was on ISO Certification. Shri K.A. Belliappa, Managing Director of Karnataka State Financial Corporation chaired the session. Shri A. Nagaraja Rao, Quality and Standards services, Bangalore presented the paper. It was explained that the concept of quality standards started with the World Wars and that ensuring zero defects can avoid wastage. The customer is a king now as we are in buyers' market. Therefore organisations have to take care of not only the stated needs of the customer but also his implied needs. Standards are equally applicable to manufacturing and services sector. ISO 9002 standards would suit financial service provider like SFCs.   

A well defined and documented quality system and procedure would definitely remove the adhocism so widely revalent in SFCs. The participants argued out the cause and effect relationship between ISO certification and improvement in financial parameters of FIs. In short run it will be difficult to establish such a relationship but in the long run, improvement is found to be there. Quality of loaning would improve; customers will have faith and confidence in the system as organisation would have defined what they do and what they say.   

The fourth session was on diversification of activities of SFCs. Shri K. Mobandas, principal secretary (Industries) chaired the session. Shri R. Achar, Dy. General Manager, RBI, Bangalore presented his paper. He opined that too much of debt financing is not in the interest of the SFCs. The need for financing of services sector was stressed. The provocation for diversification into other areas arises from the need for the continued survival of the SFCs, for meeting growing demands of the clients, to keep up with the financial markets and to accomplish objectives for which the SFCs were set up. The need for tapping the household savings was emphasised. Two new concepts viz. Development Finance Bill (DFB) and  Participation Finance Certificate (PFC) were discussed. DFB will be in the form of a usance bill drawn by the SSIs on the SFCs. This could be sold through agents to house hold sector. PFC would enable SFCs to participate in the profit of issuing SSIs. Good units would pay handsome returns and after the lock in period, the units could be bought back at NAV. These innovative ideas need to be explored futher.   

The last session on pruning of NPAs was handled by Shri S. Venkataraman, Head, Banking and Finance, Crisil Advisory Services, Mumbai. This session was chaired by Shri M. Jesudasan, Chief General Manager, RBI, Thiruvananthapuram. The NPAs of SFCs have grown over the years and of late there has been increasing emphasis on their reduction due to the increasing commercialisation of financial sector, capital adequacy and provisioning norms, disclosure norms and increasing competition. To resolve the NPAs, apart from offering revival packages, negotiated setlements, foreclosure, legal remedies, the focus areas should be the following:-   

i) Business Strategy            Selective lending   
                                         Selective diversification   
ii) Credit Managment          Sound Appraisal, Better monitoring   
iii) Organisational   
     framework                   Attitudinal changes   

The possibility of an Asset Reconstruction Fund was also discussed. The two day seminalr ended with a valedictory session. Chairman of the Kerala Financial Corporation, Shri Vinod Rai welcomed the gathering and Shri Pradeep Kumar, M.D. summed up the Proceedings. Prof. I.S Gulati, Vice-Chairman of the Kerala State Planning Board  delivered the valedictory address. He stressed on the need for reducing the NPAs of SFCs and dovetailing the project financing with the People's Plan. He also suggested that SFCs should study and analyse the inter-district variations in their performance parameter and take remedial measures. Shri K.M. Nair General Manager, SIDBI, Kochi proposed a vote of thanks.    

UPFC News   (From our correspondent)    

Incentives package for good Borrowers   

The Uttar-Pradesh Financial Corporation (UPFC) has initiated an incentive package for good borrowers. The package includes Terminal Interest Rebate Benefit (TIRB).   

With a view to encourage the entrepreneurs to make regular payment of loans to the Corporation, it has been decided that at the time of final payment of loan UPFC shall allow TIRB of 1% p.a. to them. As such good borrowers shall pay one per cent lower interest rate on their loans compared to the normal rate of interest payable.   

Past experiences reveal that many borrowers have failed because of delay in implemention of their projects, non availability of timely assistance and other procedural bottlenecks. Therefore a concept of associating a Task Manager for each unit has been introduced by the UPFC. To begin with a unit above Rs. 50 lakhs will appoint Task Manager who will assist the borrower in activities like processing, inspections, monitoring and all follow up actions.   

At present a borrower has to pay legal service charge for legal service charge for legal documentation, up front fee of 1% of the sanctioned amount at the time of first disbursment and incidental charges of 1/2% at the time of each disbursements. All these three charges amount to almost 2% of the sanctioned amount. Hence-forth it has been decided to club all these charges and reduce them to 1%. Thus instead of these three charges only one service charge of 1% will be recovered at the time of first disbursement.   

UPFC has also introduced a system of direct verification of the titles by law officers of the Corporation. This will help entrepreneurs who will not be required to run and submit various papers for legal documentation.   

UPFC has now decided to process the loan applications at field level itself i.e. at Regional Offices situated at 21 major locations of the State. This will enable entrepreneurs to get their proposals processed at a place near to them and they will not be required to visit Head Office for sanction or disbursment of their loan and all the assistance of the Corporation will be available to them almost at their doorstep.   

In another important decision UPFC has reduced the cost of loan application forms from Rs. 500/- to Rs. 100/- per set. Moreover, promoters have also been ginven facility to submit their loan applications through computer floppy etc.   

UPFC has also observed that more than 80% of first generation entrepreneurs could not achieve success in their industrial ventures due to lack of necessary know how regarding procedures, finance, technical aspect of the project and marketing etc.   

Keeping this fact in mind, UPFC has decided to launch Entrepreneurial Counselling Programme (ECP) for such first generation entrepreneurs who have strong will to set up an industry. The main objective of this ECP is develop high quality entrepreneurs and to make them aware of various aspects of the industry as a whole.   

UPFC launches novel scheme for key industries    

The Uttar Pradesh Financial Corporation (UPFC) has launched an ambitious scheme to give a boost to units coming up under thrust areas.   

The fresh scheme christened as 'Laghu Udyog Poshan Yojna' will cover units under food processing, automobiles, software, electronics, agricultural equipment and those with 100 per cent export obligations by way of financial assistance on easy terms.   

Under this scheme, the entrepreneurs would be required to pay interest which would be 5 per cent lower than the prevailing rates of interest for a period of three year and assistance would be avilable to small scale units up to March 2003, according the managing director of UPFC, Shri Ashok Khurana.   

Shri Khurana who was in Ghaziahad to launch the scheme said that the accumulated interest during the period will be recovered from the entrepreneurs in eight equal quarterly installments after the repayment of the loan.   

Shri Khurana said that the scheme has been launched to reduce interest burden on the entrepreneurs in order to help them stabilise their activities during infancy stage. No interest would be charged on the deferred interest.   

The Corporation has also introduced structured early intervention and resolution mechanism to prevent incipient sickness. "The purpose of the mechanism is to initiate timely technical and financial intervention in the small scale units hit by vagaries of the market and which are on the verge of turning sick" Shri Khurana added.   

Under the system, a case specific bail out package would be offered and if not viable and exit route to salvage the existing assets base would be provided, he said.   

The new approach will help in the reduction of long run cost to the units and the Corporation. Similarly, it will prevent the entrepreneurs from taking undue risk and gamble from resurrection, Shri Khurana reiterated.   

UPFC's schemes for sick units    

Recession and an increase in NPAs have led the UPFC to evolve innovative schemes for sick industries and also to offer concessions for loan repayment.   

Four industries; paper, steel, cement and solvent extraction are in the red. Ninety per cent of these units are sick. Loans to fifty eight per cent of these units are in the NPA list.   
In this backup, UPFC has offered the option of advance repayment of loans free of charge.   
Promoters who have money will take advantage of this offer to avoid ballooning of interest, says Shri Ashok Khurana, MD, UPFC.   
The Corporation plans to develop small industries in clusters. UPFC would take care of the financing needs, while UPSAC and UPSIC would chip in for supporting, Infrastructure and linkage. This scheme will be launched in 26 industrial areas of UPSIDC and four industrial areas of the Directorate of Industries. Units with capital and working capital and working capital cost of up to Rs. 25 lakh will be eligible for the financing. Entrepreneurs will be required to pay a maximum of 10 per cent interest on loans. The difference between the currenct interest rates and 10 per cent will be provided by the government as interest subsidy. The repayment period for the loans will be five years.   
Units in the thrust sector like food and food processing, automobiles ancillaries, electronics, software, engineering, farm quipment and 100 per cent export oriented units, will be eligible for benefits under the Laghu Udyog Poshan Yojna.   

The entrepreneurs will be requierd to pay interest which would be 5 per cent less than the current rate of interest for a priod of three years. The accumulated interest during this period would be recovered from the entrepreneurs in eight equal installments after the repayment of term loan.   

UPSIDC to set up industrial township near Loni    

The U.P State Industrial Development Corporation Limited (UPSIDC) is developing and integrated industrial township, "The Tronica City", near Loni, an existing town in the North-Eastern periphery of Delhi. It is located on the Delhi-Saharanpur highway, on the bank of river Yamuna barely 2 Kms. from the Delhi border. It has accessibility from Delhi through Alipur bandh road and from Ghaziabad through Loni-Baghpat road. The project sprawls over approximately 1,600 acres of land. Its total cost is estimated at Rs. 320 crore.   

APIIC to develop Hyderabad as Hi-Tec City    

Andhra pradesh Industrial Infrastructure Corporation (APIIC) is working on a joing venture with Larsen & Toubro on a fascinating project which aims at developing Hyderabad into a Hi-Tec City'. It is a part of the objective to support the growth of India as a major software base.   

The project is based on application of 'Virtual Reality' technique. VR is sweeping aside traditional design, development and marketing tools because of its unrivalled capacity to convert complex data into easily understood images. Engineers no longer struggle to communicate ideas to their customers, architects can now invite clients to walk into their concepts and marketing people have a sales tool which will take them confidently into the nex millennium. The new visual language communicates to all people at all levels and has become a meeting place for the accountants, engineers and customers.   

Rapid advance in graphics power and projection systems enable highly realistic walk through models to be viewed on PCs or displayed larger then life at key presentations. Other developments in video creation, Quick-Time VR, Compact Disc and the Internet extend the range of portable viewing options to suit any presentation requirement.   

Infrastructure projects are particularly suited to VR technology because of its capacity to rapidly creat accurate landscapes, cityscapes, roadways, ports, airports, hospitals and other large structures. VR is extremely versatile and can be used to sell infrastructure concepts at the idea stage. Realistic models can be created from 2D drawings or even artist's sketches. As a project develops, VR technique can even display power supplies, heating plants, waste services, security systems etc. and can therefore be handed over to the facilities management team as a meaningful management and maintenance tool. The developers can then use the many playback options as part of their portfolio when pitching for the next big project.   

In India the potential use or VR is to model the new "Hi-TEC CITY development at Hyderabad".   

The VR project will show the potential investor the total finished concept in photo realistic detail. Unlike animations, the VR modle will allow each individual visitor to go where they want while watching the model. Each journey can be simultaneously recorded onto broadcast quality video. The VR centre will alos be looking at ways for the Info City Team to run the models over the internet. This will allow the concept to be viewed from anywhere in the world. Other presentation tools will include the adaptation to the Info City model for high tech portable presentations using the convenience of laptops.   

The VR Centre is new in discussion with L&T Info City Ltd. about the first VR modelling phase of this project. Future options being considered may include the development of a VR base at the Info City.   

J&K SFC News   
(From Our own correspondent).   

The Jammu and Kashmir State Financial Corporation (J &K SFC) had introduced a rehabilitation -cumsettlement scheme in June, 1998 in terms of which it has rehabilitated and rescheduled till May, 1999. 1380 loan accounts in respect of all sectors of industries in the J&K State. In view of the response which the Corporation has received  from its loanees, the scheme stands extended upto June, 1999.   

After a gap of 8 years the Corporation for the first time has sanctioned loans to the extent of Rs. 2 crores. Majority of the beneficiaries were un-employed educated youth of the State.   

After a gap of 8 years the Corporation has for the first time earned profit during the financial Year 1998-99.   

 The Principal Secretary, Industries & Commerce, J&K Government Sh. M.S. Pandit and the Managing Director, J&K State Financial Corporation Shri Vinod Gupta recently held detailed discussion, with the Managing Director SIDBI Dr. Sailendra Narain, at Srinagar about the rehabilitation programme covering concessions required for rehabilitating the sick/closed units in the State, particularly in the Small Scale Sector and in the Hotel Industry.