SFCs  on  Reform  Path

The role of the State initiative and partnership in providing financial resource input in development and growth of State economy has been well recognised in various countries of the world.   In India, in deference to the wishes of the State Governments, State Financial Corporations (SFCs) were born as per the State Financial Corporations Act, 1951 in various States to finance medium and small scale industries, falling outside the ambit of operation of the first all-India development finance institution called the Industrial Finance Corporation of India. The State Governments felt at that time that the SFCs should encourage entrepreneurs in the small and medium sector for regional growth of industry as per the industrial and economic policies of the states and the overall economic policy of the nation.

It may be recalled that when the SFCís Act, 1951 was enacted, industrially backward areas in the states were of enormous size and hence State Governments had to think of rapid industrial development in the State through small-sized and medium-sized units alongwith large-sized ones.   Many other all-India financial institutions also came in the economic scenario of the country with the birth of ICICI, IDBI, Exim Bank, NABARD and IIBI etc. While banks and these all-India financial institutions commendably promoted and provided resource input to the large and medium industries, State Level Financial  Institutions including SFCs, SIDCs etc. started playing a major promotional role in fostering regional development of economy through their ready support to industrial units in small and medium sector. Unfortunately, while the commercial banks in India could move on progressively especially after initiating large scale liberalised economic reforms, the SFCs had to operate right from their inception within the highly restrictive confines of SFCs Act countenancing an environment of uneven competition. The inevitable consequence was a steady and steep decline in their financial soundness. After five decades, the health of the State Financial Corporations has undergone a major southward transformation so much so that the viability of their existence has been threatened alarmingly. In this gloomy backdrop, the landmark major correction in the SFCs Act now made by the recent passing of the State Financial Corporations (Amendment) Act, 2000 in the Parliament has excellently endeavoured to provide the State Financial Corporations with greater functional autonomy and operational flexibility keeping in view the emerging competitive business environment for all players in the system.  

The Act has opened up a large vista of activities which can be financed by SFCs, an exceptionally augmented base of authorised share capital, an expanded shareholder base, increasing avenues of accessing resources for SFCs, considerable pruning down of the restrictive ceiling of their assistance and functional autonomy in their funds investment etc. One of the significant provisions of the Act, thanks to the continuous and ceaseless efforts of COSIDICI, is the amendment to Section 2 of the State Financial Corporations Act, 1951 relating to the definition of Ďindustrial concerní.  As per the amended Act, the activities which can now be financed by State Financial Corporations, will almost be anything under the sun. Thus, SFCs can now finance medical, health or allied services, software or hardware services related to information technology, telecommunication or electronics, satellite linkage, audio and visual communication, setting up or development of tourism related facilities including amusement parks, convention centres, restaurants, travel and transport, tourist service agencies, construction, development, road construction, commercial complex, floriculture, tissue culture, fish culture, poultry farming, breeding and hatcheries etc.   The list is rather inexhaustible. Besides all these, any activity approved by SIDBI can be an eligible activity for SFC to take up financing. Almost sky is now the limit for SFCs to venture into any arena of business.  

The other major provision of the amended Act, again thanks to COSIDICI, is the minimum and maximum authorised capital that can be fixed by the State Government at Rs.50 lakhs and Rs.500 crores respectively. Even the maximum authorised capital can be enhanced by the State Government on the recommendation of SIDBI to Rs.1000 crore. The equity stake in the SFCs that can be taken up by State Government, SIDBI, Public Sector Banks, LIC, other Insurance Companies  or other Institutions owned or controlled by State Government or the Central Government in aggregate shall in no case be less than 51%.  The avenues of access to borrowings and tapping of deposits by SFCs have been widened  and thus there is a huge scope and coverage of operational flexibility of SFCs. The only fundamental but vexatious issue is now how best and in what manner recapitalization of SFCs can be structured and given effect to. Even this also has been taken up by the Government of India, Ministry of Finance. A high-level 9-Member Committee has been set up by the Banking Division, Ministry of Finance, on 5th September, 2000, under the Chairmanship of Shri G.P. Gupta, Chairman of IDBI, to suggest, among other things, restructuring and recapitalization of SFCs so that SFCs can now function on a level-playing field. The committee is expected to submit its report within 3 months.  It will certainly be no exaggeration to say that triggering of all these revolutionary reforms now taking place in the SFCs sector is largely because of COSIDICIís relentless and strenuous efforts especially during the last several years.  COSIDICI will continue its missionary and vigorous pursuit of revamping the SLFIs sector on a solid foundation.