The State Financial Corporations were set up in the States in early 50s with the objective of promoting economic growth, balanced regional development and widening of entrepreneurial base by promoting and financing medium scale and tiny industries. When these corporations were set up, it must be borne in mind, there were absolutely no institutional arrangements for providing financial facilities in the rural, semi-urban and backward regions of the States both for agricultural and industrial development. The only institutions, which operated in those areas, were co-operative credit institutions, whose role in financing agricultural and non-farm activities, was too insignificant to mention. The Rural Credit Survey Report, 1951, had disclosed that only 3% of the rural credit was met by the co-operative credit institutions and bulk of the credit requirements of the rural masses was met by the local money-lenders. The Report, however, observed that the "co-operatives have failed in this country, but they must succeed." The state financial corporations were promoted as a state policy to fill the credit gap in the rural and backward regions of the States and promote first generation entrepreneurs for the development of industries. It will not be an exaggeration to state that the SFCs have achieved these objectives to a large extent. Majority of the medium and large-scale industrialists of to-day had started their ventures with the financial assistance from SFCs.

The financial sector reforms introduced in 1991, which brought about deregulation of the banking sector, had dealt a severe blow to the operations of state financial corporations since they were denied a level-playing field vis-à-vis commercial banks and other financial institutions. Their financial position had been steadily deteriorating largely on account of apathy on the part of the stake-holders and their inability to compete with the commercial banks. These SFCs have been passing through serious financial crisis and are virtually struggling for their survival. Despite this alarming situation, it has been conceded by all concerned, including SIDBI, that these development financial institutions operating at the grass-roots level are as relevant to-day as they were 50 years back. Their strengthening and revival was, therefore, strategically important for balanced industrial development of the country. With these objectives in view, as also to bring about necessary reforms in their functioning in tune with the business environment, the SFCs Act was amended by the Government of India in September, 2000, and simultaneously, Gupta Committee was constituted to look into their problems of financial restructuring and re-capitalization. SIDBI has been assigned the role of a nodal agency under the statute to ensure growth of these institutions on sound and healthy lines. SIDBI was, therefore, expected to respond positively to the genuine needs and aspirations of SFCs. I find that, despite amendments in the SFCs Act and recommendations of the Gupta Committee for their re-capitalization, things have not started moving in the right direction. The situation has been further aggravated on account of indifference on the part of the stake-holders, including SIDBI, in coming to their rescue. In view of the strategic importance of these organizations in the country's economy, the imperative need was to devise measures for reviving them, rather than denying relief on the ground of their existing financial problems. SIDBI's role in strengthening and reviving these institutions, therefore, can hardly be over-emphasized.

SIDBI, as a guardian of SFCs, should have taken some positive initiatives in resolving the problems of the SFCs to the extent possible. However, it has been observed that SIDBI, right from the day it came into existence, had adopted a rather indifferent attitude towards the SFCs. Instead of adopting a pro-active and helpful approach, it has all the time been devising methods to deny adequate refinance to SFCs to meet their genuine requirements and also extend necessary relief in their operations. COSIDICI has been holding regular meetings with SIDBI, during the course of which it was persistently emphasized that SIDBI should initiate some short-term measures to enable SFCs to compete with commercial banks, such as reduction in interest rates on old loans and permitting SFCs to prematurely repay their high cost debt without any penalty or premium. The issue relating to reduction of interest rates on old loans has been under discussion with SIDBI since 20th August, 1999. However, nothing has so far emerged out of these discussions. In the process, SFCs suffered in two ways; firstly, they lost good clients who were regularly paying their dues and secondly their NPAs increased as the remaining clients were unable to service their high interest-bearing loans. In the absence of such relief measures, the SFCs have further slipped deep into the financial crisis. It was quite apparent that SIDBI was not genuinely interested in promoting SFCs, but had to be in the picture because of its statutory obligations. The meeting convened by SIDBI at New Delhi on 8th March, 2002, had proved to be a damp-squib and was nothing short of a well-orchestrated drama with all the pomp and show of a 5-star hotel. The purpose of this meeting was obviously to win support of the government authorities in denying genuine relief to SFCs. The Committee set up by SIDBI on operational matters of SFCs has been in the process of laying down some criteria for providing refinance to SFCs. The scoring system proposed by SIDBI and circulated among all SFCs has not been favoured by any of the SFCs since the system appeared to be too stringent. If the said scoring system was put into operation, hardly any SFC would be eligible for getting the refinance from SIDBI. SIDBI seems to have consciously thought of this device to legitimize its actions under the guise of this Committee's report to deny refinance to SFCs. 

It may also be mentioned that SIDBI has been directly competing with SFCs in the mater of financing individual SSIs. Instances have been reported where the prospective clients of SFCs were lured away by SIDBI by offering better terms. Direct financing by SIDBI has tended to dilute its developmental functioning. SIDBI's role as direct-provider of finance to SSIs in competition with SFCs appears to be incompatible with its role as apex refinancing institution. As a matter of principle, SIDBI should concentrate on its refinance role and development of primary lending institutions on healthy lines. SIDBI's growing appetite for direct financing appears to be a major contributory factor for its unhelpful attitude towards SFCs.