ACTIVITIES  OF  COSIDICI


  
During the months of November and December, 2000, COSIDICI was actively engaged in the preparation of comprehensive Memorandum for submission to the High Level Committee constituted by the Govt. of India, Ministry of Finance, to look into the functioning of State financial Corporations.  Further, consequent upon coming into force of SFCs (Amendment) Act, 2000,  an added responsibility was undertaken by COSIDICI for the  preparation of model Regulations under the amended Section 48 of the Act ibid.  The details of the activities are furnished below :

1. Committee for Restructuring of SFCs :

1.1. The Govt. of India, Ministry of Finance (Banking Division), soon after the SFCs (Amendment) Act, 2000, came into force, set up a High Level Committee under the Chairmanship of Shri G.P. Gupta, CMD IDBI, to look into the functioning of State Financial Corporations and make recommendations for their re-structuring and revitalisation.  The Govt. of India nominated, among others, two Chief Executives from State Level Institutions, viz., Dr. Vishwapati Trivedi, Managing Director, MPFC, and Shri A.K.D. Jadhav, Managing Director, SICOM, on the said Committee.  The Govt. of India, however, did not give representation to COSIDICI on the above Committee.  COSIDICI had represented to the Ministry of Finance (Banking Division) to co-opt the President COSIDICI, Smt. Yasmin Ahmed, IAS., on the above Committee, so that the views of COSIDICI, as the apex body  of State Level Institutions, could also be reflected in the deliberations of the Committee.  Though belatedly, the Govt. of India, Ministry of Finance, agreed to co-opt Smt. Yasmin Ahmed, President COSIDICI, on the above Committee in December, 2000, and she was invited to attend the 4th Meeting of the High Level Committee held at Mumbai on 27th December, 2000. 

1.2. With a view to communicating the views of COSIDICI on the terms of reference of the Committee, a comprehensive Memorandum was prepared by the COSIDICI Secretariat and the same was forwarded to the Committee in November, 2000.  Besides, a copy of the Memorandum was also forwarded to all the Chief Executives of SFCs.  The following broad issues were brought out in the Memorandum : 

(i) The vital role played by SFCs in the States in promoting and financing small scale and tiny industries in the rural and backward regions of the States was highlighted.  It was indicated that the SFCs had played a significant role in promoting small scale industries in the country and if the small scale sector occupied the place of pride in the national economy to-day, it was largely due to the ceaseless efforts made by SFCs in promoting the first generation entrepreneurs and financing of industrial ventures in the countryside.  It was, therefore, contended that the strengthening of SFCs to bring about decentralization of industrial activity and means of production and widening of entrepreneurial base in the country was in the larger interest of the economy. 

(ii) The SFCs were victims of liberalisation and financial sector reforms introduced in the country in early nineties.  The SFCs were placed at a most disadvantageous position vis-à-vis commercial banks and other financial institutions, inasmuch-as while the SFCs had to function within the bounds of SFCs Act, which was highly restrictive in character, the commercial banks and other financial institutions were functioning with greater autonomy and operational flexibility.  The traditional turf of SFCs in financing SSIs had been usurped by commercial banks and SFCs were facing acute competition from these institutions.  Resultantly, the working and financial position of SFCs registered a steep fall during the past 8 years because of their vulnerability  to the market forces and their inability to compete with commercial banks. 

(iii) The financial health of State Financial Corporations had been steadily deteriorating during the past one decade and their overall operations had shown a declining trend and their sanctions and disbursements  recorded a negative growth.  These Corporations were not set up for profit maximization, but for fulfilling critical social obligations like generation of employment opportunities, poverty alleviation, broadening of entrepreneurial base, removal of regional disparities, economic development of backward regions, etc.  If their owned funds had been eroded to a large extent, it was entirely due to the accumulation  of bad debts resulting from the high-risk areas (priority sector) in which these Corporations have been operating.  A good portion of the non-performing loan was traceable to the over-riding socio-economic programmes and directives of the Government.  While in the case of nationalised banks bulk of the NPAs and bad debts flow from commercial sector, in the case of SFCs more than 90% of the NPAs were accounted for by priority sector lending.  Out of 18 SFCs, only 3 SFCs have capital adequacy ratio of 8% and above, in 3 SFCs the capital adequacy ratio was below 8% and in the remaining 12 SFCs the capital adequacy ratio was reduced to negative.  There was, therefore, an urgent need to recapitalise the SFCs on a case-to-case  basis.  The Govt. of India, in consultation with State Government and IDBI/SIDBI, may provide a one-time grant of Rs.2,500 crore to SFCs for their re-capitalisation and financial re-structuring to enable them to function effectively and continue to perform their developmental role in the States. 

(iv) Apart from re-capitalisation of SFCs, it was also necessary to provide cheap resources to these Corporations to carry on with their day-to-day operations.  As already mentioned, SFCs were facing acute competition from commercial banks in financing SSIs.  The cost of funds of commercial banks was about 8% as they had access to public deposits and were, therefore, able to provide finance to SSIs at cheaper rates.  SFCs, on the other hand, were unable to provide loans at cheaper rates since their cost of funds was above 12%.  With a view, therefore, to provide a level-playing field to SFCs, COSIDICI had suggested some measures for providing cheap resources to SFCs to enable them to compete with commercial banks.   In this connection, the following suggestions were made :- 

  • Since SIDBI had been assigned the role of nodal agency for promoting and developing SSIs in the country, as also promoting the interests of primary lending  agencies, it should provide  refinance facilities to the SFCs to the extent of 90% of their advances to SSIs at a rate of interest not exceeding 10%. 
  • The Govt. of India may consider allocating substantial share of tax-free bonds to SIDBI , the proceeds of which should be exclusively used to provide refinance support to SFCs at a lower rate of interest, i.e. 10%. 
  • Commercial banks may provide a line of credit to SFCs at 2% below their prime lending rate.  This was based on the logic that deposits mobilized by commercial banks from rural and backward regions of the States, which were predominantly served by SFCs, are being deployed elsewhere and those regions were deprived of the finance for developmental purposes.  The SFCs have a legitimate claim on the portion of the public deposits mobilized by commercial banks from such areas.  This was quite apparent from the low credit deposit ratio in rural and backward regions of the States.  The Govt. of India and RBI may, therefore, consider issuing necessary directives in this regard to commercial banks. 
  • The Reserve Bank of India may be advised by Govt. of India to resume financial support to SIDBI  out of National Industrial Credit (Long-Term Operations) Fund for the development and promotion of industries in the country.  Such support to SIDBI from RBI will greatly help in bringing down the interest rate on the refinance to be provided by SIDBI. 
  • The SFCs may be permitted to set up banking subsidiaries which will enable them to mobilise public deposits at comparatively cheaper cost.  The resources thus mobilised would be entirely deployed in the States and will resultantly push up the credit deposit ratio.  This will also help SFCs to utilise their surplus man-power which can be conveniently shifted to the banking subsidiaries. 
(v) The prudential norms made applicable to SFCs indiscriminately following the recommendations of the Narasimham Committee such as Asset Classification and Provisioning, may have to be relaxed suitably keeping in view the special environment under which they operate. 

(vi)  SIDBI, which has been conceived as a nodal agency at the apex level for promotion and development of industries in the small, tiny and cottage sector, should not be allowed to lend directly in the field and come into direct competition with SFCs.  It should confine itself to its developmental role as a principal refinance institution at the apex level. 

A copy of the Memorandum, besides being forwarded to the Secretariat of the Committee, was also forwarded to the individual members of the High Level Committee for consideration. 

1.3. The High Level Committee had held its 3rd meeting at New Delhi on 20th November, 2000.  The Committee had invited the Chief Executives of all State Financial Corporations, besides the President COSIDICI and the Secretary General COSIDICI to elicit their views on the various terms  of reference of  the Committee.  The deliberations in the meeting were quite lively and businesslike and provided an opportunity to the Chief Executives of SFCs to ventilate their views, which were taken into account by the Committee for formulation of their recommendations. 

1.4. The High Level Committee had held its 4th Meeting at Mumbai on 27th December, 2000.  Since Smt. Yasmin Ahmed, IAS., President COSIDICI, had been co-opted by the Govt. of India, Ministry of Finance, on the said Committee, she was also invited to attend the meeting.  However, since she had gone abroad and was not available, the Secretary General COSIDICI, Shri K.K. Mudgil, represented her in the meeting.

2. SFCs (Amendment) Act, 2000 - Preparation of Regulations :

2.1. The SFCs (Amendment) Act, 2000, had come into force with effect from 6th September, 2000.  In terms of the amended provision of Section 48 of the Act ibid, the Board of State Financial Corporations was empowered to make Regulations after consultation with SIDBI and with the previous sanction of the State Government.  With regard to making of Rules under the Act ibid, amendment has brought out a significant change inasmuch-as in the principal Act, the power to make rules under the Act vested with the State Government, while under the newly inserted Section 48B this power now vests with the Central Government. The SFCs will now have to make Regulations in the areas enumerated in Section 48 of the Act ibid.  Following the amendment of SFCs Act, the Chief Executives of SFCs had generally felt that an attempt could be made to prepare model Regulations under the amended Act for adoption by SFCs to ensure uniformity in their contents and operation.  They had requested COSIDICI to undertake this work and suggested that a meeting of Chief Executives of SFCs could be convened by COSIDICI wherein modalities for formulation of model Regulations could be discussed.  Accordingly, a meeting of the Chief Executives of SFCs was held at New Delhi on 21st November, 2000, to discuss and exchange views regarding formulation of uniform set of Regulations under Section 48 of the Act ibid.  It was decided, among others, that 5 SFCs would depute their Legal Officers/concerned Officers to COSIDICI for assisting Secretary General in the preparation of the Model Regulations.  In pursuance of this decision, five Officers  from SFCs had attended the office of COSIDICI from 4th to 6th December, 2000, for the purpose of preparing a draft of the Model Regulations.  The draft was circulated among all the SFCs and they were requested to offer their suggestions/comments. 

2.2. The draft Regulations were also placed in the meeting of the Executive Committee of COSIDICI held at Munnar on 16th December, 2000.  The draft Regulations evoked a lot of discussion among the Members and the following suggestions emerged :- 

  • The draft Model Regulations should be as brief as possible and efforts should be made to avoid repetition of the text of the Act under various provisions; 
  • The Model Regulations should specifically concentrate on areas which are left blank in the Act and where the Board of Directors of SFCs are required to frame Regulations for carrying on the day-to-day affairs of the Corporation;
  • The restrictive provisions in the existing Regulations relating to meetings of the General Body, Board of Directors and Executive Committee, etc., which sometimes put avoidable hurdles in the working of the Corporation, should be removed consistent with the provisions of the Act.
The Executive Committee had constituted a Committee under the convenorship of Shri K.M. Shiva Kumar, IAS., Managing Director, KSFC, to discuss the draft Model Regulations again in the light of suggestions received from SFCs and prepare a final draft for adoption by SFCs.  The Executive Committee had suggested that the SFCs may forward their comments/suggestions to COSIDICI by 31st December, 2000.  It was decided that the Committee will meet at Bangalore on 10th January, 2001, to finalize the draft of the Model Regulations. The meeting has  now been postponed to January 31, 2001. 

3 Allotment of plot of land by DDA for constructing COSIDICIís building at Delhi :

COSIDICI had approached DDA in the month of February, 2000, for allotment of a plot of land at Delhi for construction of COSIDICIís own building.  The matter has been under correspondence between DDA and COSIDICI since then.  On 12th December, 2000, the Secretary General COSIDICI met the Director (Institutional Land), Smt. Asma Manzar in DDA and had detailed discussion with her.  The DDA, it may be mentioned, had earlier offered a plot of land measuring 2,000 sq. meters in Janakpuri or Dwarka Institutional Areas.  However, the Executive Committee of COSIDICI had preferred to acquire the land in Vasant Kunj Institutional Area and COSIDICI had accordingly advised DDA in this regard. During the course of his discussion, Shri K.K. Mudgil, Secretary General, impressed upon the Director (IL), DDA, the need for allotting a smaller piece of land measuring 1,000 sq. meters in Vasant Kunj Institutional Area instead of other areas. The Director (IL), after hearing the Secretary General, had indicated that DDA was prepared to allot a piece of land admeasuring 1,000 sq. meters to COSIDICI in Vasant Kunj Institutional Area at a cost of approximately Rs. 45 lakh.  For that purpose, COSIDICI was advised to fulfil some basic formalities such as submission of Income-tax Exemption Certificate from Income-tax Department, a letter of recommendation from the concerned Ministry to DDA for allotment of land to COSIDICI and a copy of the Registration Certificate of COSIDICI under Societies Registration Act, 1860.  The matter is being pursued with DDA and, in the meanwhile, steps have been taken for approaching the Income-tax Department for issue of Income-tax Exemption Certificate.  The Ministry of Finance (Banking Division) is also being approached for issuing a letter of recommendation to DDA in this regard. 

4. Executive Committee Meeting at Munnar : 

The Executive Committee Meeting of COSIDICI, as also its Special General Body Meeting, was held at Munnar (Kerala State) on December 16, 2000.  The Executive Committee had taken the following important decisions :- 

4.1. The Executive Committee had reviewed its earlier decision to make training arrangements for the Executives of SLFIs at the Central Institute of Road Transport, Pune, and decided not to pursue the earlier proposals.  The Executive Committee decided that :

(i) The training programmes for the officers of SLFIs may be arranged at zonal level to curtail avoidable travel expenses of the participants.  For this purpose, the Secretary General COSIDICI was advised to negotiate with the following establishments for arranging exclusive training programmes for the officers of SLFIs :-

  (1) Staff College of South India Bankersí Association, Bangalore.
  (2) College of Agricultural Banking, Reserve Bank of India, Pune.
  (3) Bankersí Institute for Rural Development, NABARD, Lucknow.
  (4) National Institute of Banking Studies and Corporate Management, New Delhi. 

(ii) Two-tiers of training programmes may be arranged, one programme for the senior executives such as ED, General Managers and Deputy General Managers and the second programme for the middle level and junior officers of the Corporations.  The training module for both the programmes will also differ.

(iii) The training programmes will be integrated in nature with a mix of both skill upgradation and human resource development like inter-personnel skills and motivation, etc.

(iv) The duration of the training programme may not exceed five working days.

(v) Shri K.M. Shiva Kumar, IAS., MD KSFC, would provide broad guidelines and framework for structuring the syllabus of the training course to COSIDICI as early as possible.

(vi) COSIDICI may prepare a list of resource persons who can be invited as guest faculty to deliver talks on specialised subjects.

4.2. Increase in the annual subscription of Members :

The Executive Committee had reviewed the financial position of COSIDICI and it was felt that, keeping in view the inflationary pressures in the economy and resultant rise in the cost of inputs and services, the resources of COSIDICI needed to be augmented. Since the only resource of revenue of COSIDICI is the annual subscription received from Member Corporations, the Executive Committee had decided to increase the annual subscription of Members from the existing Rs. 30,000/- and Rs. 15,000/- in the case of larger and smaller Corporations to Rs. 50,000/- and 
Rs. 25,000/- respectively with effect from 1st April, 2001.