The meeting between COSIDICI delegation, headed by Dr. D.C. Misra and Shri G.P. Gupta, Chairman & Managing Director, IDBI, was held in IDBI Board Room. Mumbai, on 30th June, 1999 at 11.30 a.m. to discuss the problems faced by state-level financial institutions viz. restructuring, recapitalisation, high level of NPAs and over dues of  SFCs, floating rate of interest etc. The delegation also took up the issues of formation of a committee of specialists, by IDBI as suggested by Governor, RBI to took into the problems of SLFIs.  

The meeting between COSIDICI delegation, headed by Dr. D.C. Misra,  and Shri G.P. Gupta, Chairman & Managing Director, IDBI, was held in IDBI Board Room, Mumbai, on 30th June, 1999 at 11.30 a.m. to discuss the problems faced by state-level financial institutions viz. restructuring, recapitalisation, high level of NPAs and over dues of SFCs floating rate of interest etc. The delegation also took up the issue of formation of a committee of specialists by IDBI as suggest by Governor, RBI to look into the problems of SLFIs.  

IDBI's views emerging out of the discussions are as under:-  


Shri Gupta CMD IDBI told the delegation that IDBI had made all the preparations for setting up of the Committee and had settled the terms of reference as well, in the middle of April, 1999. Since IDBI wanted to include a representative from the Govt. of India (Department of Banking) in the proposed Committee, the matter was referred to them. The Govt. of India had indicated that since the Bill for amendment of SFCs Act was under the active consideration of the Govt. of India and was likely to be introduced in the next session of the Parliament, the setting up of the proposed committee would, therefore, not serve any useful purpose. Dr. Misra, reacting to this position, said that the two issues were completely different since the proposed amendment to SFCs Act did not in all probability address the issues which are expected to be looked into by the proposed committee. Dr. Misra, therefore, requested IDBI Chairman to take up the matter suitably with the Govt. of India and ensure that the proposed committee was set up without any further delay. Shri Gupta promised to take up the matter again with the Government and inform COSIDICI in due  course.  


IDBI would issue guidelines to SFCs/SIDCs for constitution of Settlement Advisory Committees for recovery of NPAs/Overdues and entering into onetime settlement' with the borrowers. He also agreed that a representative from IDBI would also be nominated to such committees.   


With a view to providing financial support to the SFCs/SIDCs. Shri Gupta agreed to relax the limit of re-finance upto 80% as against 65% as at present.  


Regarding premature re-payment of loan by the borrowers to the SFCs and, in turn, by SFCs to IDBI/SIDBI, Shri Gupta agreed to charge 50% premium on the amount of premature instalment pre-paid to IDBI/SIDBI. In other words, IDBI/SIDBI would charge additional interest for 11/2 months instead of 3 months, as at present.  


Regarding the proposal to introduce floating rate of interest, it was agreed the Managing Director, SIDBI, would call a meeting of state financial Corporations in the month of July at Lucknow to examine the proposal in greater detail and work out the modalities for introduction of floating rate. (The meeting is scheduled for August 20, 1999).   


Shri Gupta assured the delegation that till a formal notification in this regard was issued by the Government, IDBI/SIDBI would continue to work on the existing definition and would not disturb the status quo.  


With regard to providing direct finance by SIDBI to SSI units, Dr. Narain also pointed out that SIDBI was not competing with SFCs and was financing only large projects for which finance was generally not forthcoming from SFCs. He said that the direct finance provided by SIDBI formed hardly 1-2% of their total advances amounting to Rs. 45,000 crones.  


Shri Gupta agreed to arrange specific training programmes for the benefit of SLFIs and requested Dr. Misra to send him the necessary feedback in this regard. Dr. Narain said that SIDBI has been organizing regular courses in the Hyderabad Institute for the benefit of SLFIs and requested COSIDICI to impress upon their member corporations to avail of this facility. He further informed that a specific training programme for SFCs has been arranged at Bankers' Institute of Rural Development (BIRD), Lucknow, from 2nd to 8th August. 1999. Shri Gupta agreed that IDBI would arrange in-house training programme for individual SFCs on a specific request made to them. He also indicated that COSIDICI's request for financial support for organizing training programmes for SLFIs would be considered by IDBI/SIDBI.  
COSIDICI Apprise RBI Of Its Views On Khan Working Group Report  

COSIDICI was disappointed to note from the Discussion Paper released by RBI that the Reserve Bank of India has, by and large, abstained from commenting on the various recommendations made by Khan Working Group (KWG) relating to State Level Financial Institutions (SLFIs). Reserve Bank while using the word `DFIs' (in footnote at page 5 of the Paper), has also excluded the SFCs/SIDCs, which implies that the views expressed by it (RBI) in the Discussion Paper were confined to the all India Financial Institutions and all India Refinance Institutions and that the SLFIs were excluded from the scope of the discussion.  

SLFIs are an integral part of the country's financial system operating at the grass root level. They have recorded an impressive performance in providing financial assistance for the promotion and development of small scale, medium scale and cottage industries in their respective states. The impressive performance of small scale and cottage sectors in the past has been made possible due to the ceaseless efforts of  SLFIs in promoting and nurturing them. No other category of financial institutions has got the out-reach and capabilities to replace these SLFIs in the field. Moreover, the SFCs/SIDCs have played a pivotal  role in the development of backward regions and promotion of first generation entrepreneurs. Their crucial role needs recognition. COSIDICI expects that the Reserve Bank should accord highest priority  in their scheme of things in treating SLFIs on par with commercial banks and all India financial institutions while carving out their future role in their respective fields in the wake of liberalization   
and financial sector reforms.  

COSIDICI strongly feels that any reforms in the financial sector which do not embrace the grass root level organizations like SLFIs, are not likely to deliver the goods since these institutions were engaged in socio-economic development of the regions and need the patronage from the policy makers for carrying on their developmental activities.   

In the emerging scenario of economic reforms based on market force,  the future role of SLFIs needs to be re-defined along with banking  companies and all India financial institutions. The term `DFI' used in the `Discussion Paper', therefore, should include the State-level Financial Institutions, particularly the State Financial Corporations, which are creations of a Central Act and have been notified as `Public Financial Institutions' under Section 4-A of the Companies Act, 1956. On KWG's specific recommendations, COSIDICI has commented as under:-    


    The KWG has made the following recommendations with regard to the need to infuse market orientation in the operations of State-level Institutions:   
    Paras III, 5.7 and III. 5.8 - "The reforms in financial sector have necessitated market orientation in the operations of state-level  institutions. Refinance support from IDBI/SIDBI has been reduced. Some of these institutions have accessed the market for raising resources. A few strong SFCs/SIDCs have also raised equity capital from the  market." "There is thus a pressing need for reforms in SFCs/SIDCs,' particularly in view of the emerging changes in the operating  environment. To enable SFCs to adapt to the emerging challenges, it is necessary to restructure their organization and management, broaden their resource base and carry out financial restructuring after a review of the financial health of individual SFCs."  
    COSIDICI fully agrees with the above observations of KWG and strongly feels that, keeping in view the crucial role being played by SLFIs in developing industrial base of the country and fulfilling critical  social obligations like entrepreneurial development, employment generation, removal of poverty, development of backward areas, these institutions must be further strengthened to enable them to continue to play this role in the overall economic development of the country. A good portion of the non performing loans is traceable to over-riding socio-economic programmes and directives of the Government. The urgent task, therefore, is to recapitalise SFCs and initiate their financial and managerial re-structuring on a case-to-case basis. The financial  re-structuring of SFCs on selective basis may be undertaken by SIDBI.The RBI may, therefore, accept the recommendations of the Working Group and take up with the Govt. of India the need for infusing fresh capital in these organizations on the lines of nationalised banks and Regional Rural Banks. The Government of India has been providing fresh capital to nationalised banks where the capital adequacy ratio was inadequate and the banks were saddled with NPAs and bad debts. While in the case of nationalised banks, bulk of their NPAs flow from commercial sector, in the case of SFCs more than 90% of the NPAs were accounted  for by priority sector lendings. Accordingly, restructuring and recapitalisation of SFCs was urgently required to improve their financial health and operational efficiency.  

    "In a scenario where DFIs are leaning towards universal banking on commercial considerations, if they are expected to assume any specific development obligations, RBI/Government should provide a proper level of financial support to enable them to fulfil these obligations. The support could assume the form of a line of credit/refinance etc."  
    The COSIDICI fully agrees with the above recommendation of the Working Group. The RBI in its Discussion Paper has dealt with the concept of universal banking extensively. COSIDICI agrees with the views of RBI that immediate switchover to universal banking would not be in the overall interest of the national economy, keeping in view the complexity of the situation and the wide-range of financial intermediaries operating in the field.  
    The SFCs are now facing competition from the commercial banks, which have started, in a big way, extending term-loans to the small scale sector. Further, SIDBI, which is a refinancing body at the apex level, is also competing with the SFCs in the matter of financing of individual SSIs. The State-level Financial Institutions have been facing financial crisis since they have not been able to mobilize necessary resources from the market and the refinance facility from SIDBI/IDBI was not sufficient to sustain their loaning operations. Since these DFIs are performing specific developmental obligations, there is need for providing adequate and cheap resources to these organizations to enable them to compete with other financial institutions operating in the field and continue to play their developmental role. The interest of these SLFIs, therefore, needs to be protected by the RBI/ Government by providing them adequate resources at cheap rate, which can be done in the following way: 
    • By permitting SLFIs to establish Local Area Banks in their respective states;
    • By allocating larger share of tax-free bonds to them to mobilize cheap resources;
    • By issuing directive to commercial banks to finance SLFIs at below their Prime Lending Rate and providing financial support to the SLFI s out of National Industrial Credit (Long-Term Operations) Fund.


    The KWG report includes amongst SLIs not only SFCs and SIDCs, but also State Small Industries Development Corporations (SSIDCs) and recommends eventual merger of the three in each state, into a single entity. COSIDICI does not favour merger of these state-level institutions on the following grounds: 
    • It does not spell out the rationale for inclusion of SSIDCs in its merger scheme. While SFCs and SIDCs are largely term-lending institutions covered by IDBI's re-finance scheme, SSIDCs are not financial institutions in any sense of the term. They have been described vaguely in the report as institutions established to "cater to the needs of the small, tiny and cottage industries."
    • The SSIDCs are primarily agencies `to help small industries in procuring raw-materials and support their marketing efforts'. If they become a part of the lending institutions, it would lead to a prima- facie odd situation wherein the FI, which appraises a project for financing, also takes responsibility for arranging raw-materials and for marketing of its products. 
    • While SSIDCs have been classified as `SLIs' by the report, the state - level corporations engaged in industrial infrastructure, which also cater, in a large measure, to the needs of small and medium industries, have not been mentioned at all.
    • SIDCs have been described as "catalysts for promotion and development of medium and large industries," but the role which most of them play in the area of industrial infrastructure, has not been mentioned. SIDCs are financing large scale industries and their merger with SFCs would create operational problems.
    • Further, since these institutions are functioning under the  administrative control of the respective state governments, it is necessary to elicit the views of the state governments with regard to the proposed merger.


    According to the report, "an immediate term imperative is the corporatisation of these entities" (meaning the SFCs, SIDCs and  SSIDCS). The recommendation is somewhat misleading as two of these entities, viz., SIDCs and SSIDCs, are already corporatised. The report admits this fact elsewhere when it says that SIDCs and SSIDCs are governed by the Companies Act. The recommendation thus, in effect, suggests corporatisation only of SFCs, which operate under the aegis of SFCs Act, 1951. SFCs Act, as stated in Chapter I II of the report,  is due for amendment and the report of the Amendment Committee is before the Government of India since May 31, 1994.  
    If SFCs nave to be corporatised and eventually merged with SIDCs/ SSIDCs, the SFCs Act will have to be abrogated. Although this has not been stated by the Group in clear terms, it can be inferred that if this recommendation of the Group is accepted, no further action on the report of the Amendment Committee is called for. In that case. it  is not clear as to what would be the fate of provisions like Section 29, 30, 31 and 32-G, etc. of SFCs Act, which have also been extended to SIDCs and on which both SFCs and SIDCs depend substantially for the recovery of their dues. The COSIDICI, therefore, is of the opinion that this recommendation in its present form should not be accepted.  

    The KWG recommends that following re-structuring/reorganisation, strong SFCs could be encouraged to go public by making IPOs. In the process, the State Government's holding in these Corporations may be allowed to be brought down to below 50% and thereby moving them out of the purview of the State Government's control in due course. One of the thrusts of the Group's report, apparently, is privatisation of SLIs. However, the recommendation in regard to reduction of state government share to below 50% has been made in categorical terms only in respect of SFCs (and that too strong SFCs). If this idea is applied only to SFCs, the privatisation will only be a transient phase. Once SFCs merge with the other two SLIs, wherein state government holding  is mostly 100 per cent, the government would once again become a  majority share-holder in SLIs. This recommendation,- therefore, needs further elaboration.  
    Since the credit requirements of small scale industries are being taken care of by SIDBI, it would be desirable to transfer the present shareholding of IDBI in the SLFIs to it. Over the time, equity holding in these entities should be allowed to dwindle to 25% through disinvestment/IPOs. The intention of the Working Group apparently is to free SFCs from dual control of IDBI/SIDBI, against which the SFCs have sometimes complained. COSIDICI agrees with this recommendation and commends its implementation.  
    It is also inferred, although it is nowhere stated in clear terms that the extant relationship between IDBI and SLIs (other than SFCs) will also be transferred to SIDBI. SIDBI has been projected as nodal/co-ordinating agency for financing small and medium industries. It is also stated that SIDBI's role in SLIs (not only SFCs) should be both as stake-holder and resource-provider. Under the law, as it stands at present, SIDBI is precluded from granting assistance to industries other than small scale ones. The Group's report does not indicate that SIDBI 'Act would be amended to enable it to assist medium sector also. Even its name may have to be changed to Small and  Medium Industries Bank of India. And even after such an amendment, SIDCs would remain uncovered in respect of their assistance to large-scale industries. How in that case SIDBI would be able to assume IDBI's entire role vis-a-vis all SLIs? The matter needs elaboration. 

    The report recommends de-linking of SIDBI from IDBI and transfer of latter's equity-holding in the former to Government or RBI and thereby according to it the same status as nodal/co-ordinating agency for financing of small and medium industries as is now available to NABARD in the field of agricultural development. It also suggests SIDBI's access to assured sources of concessional funding from RBI through NIC(LTO) Fund, etc.  
    COSIDICI agrees with this recommendation. However, it feels that while transferring IDBI's equity holding in SIDBI either to Government or RBI, at least 25% of the equity may be offered to SLIs, in view of the fact that SIDBI will be an apex body for looking after the interests of the small scale and tiny sector. Acquisition of SIDBI's shares would entitle SLIs to have representation on its Board and would thus be in a position to influence its policy framework. It will also provide an opportunity to SLIs to project their aspirations and problems in SIDBI Board for seeking viable solutions.  

    The Working Group recommends that SLFIs should be given more operational freedom. They should be provided an array of new products and services including short-term loan, equipment leasing, etc. on the lines of All India FIs. With the drying up of concessional and assured funding from the Government and IDBI, the SLFIs would have to turn to other sources of mobilization to sustain their operations. COSIDICI fully agrees with this recommendation and requests that SLFIs (SFCs and SIDCs) should be provided adequate resources on cheap terms either through appropriate line of credit or by allocation of tax-free/SLR bonds to sustain their operations. Further, they may be allowed to mobilize resources from the market without any hindrance for providing both long-term and short-term finance under a broad-based modified Single Window Scheme (SWS). 
  • The Group's recommendations relating to reduction in the State Government's holdings in SLFIs to below 50%, merger of SLFIs and their strategic alliance/merger with banks, manner of appointment of CEOs in SLIs will have to be provided for in the proposed amendment of SFCs Act and such other statutes, in due consultation with the State Government. The state governments will have to take their own decision for accepting these recommendations, particularly moving SLIs out of the purview of their control.