The activities, coverage and overall performance of State Financial Corporations are currently being studied by a 9-Member High Level Committee under the Chairmanship of Shri G. P. Gupta, Chairman & Mg. Director of IDBI, constituted on 5th September, 2000, by the Govt. of India.  The Committee is expected to look into and address, inter alia, the whole gamut of issues of operational, financial and organisational re-structuring, recapitalisation  and revitalisation of SFCs and suggest specific measures including identification of resources of recapitalisation and re-structuring funding, measures for NPA containment, business profile and business-mix, keeping in view the emerging role and status of SFCs in the Indian financial system. Their report is expected to be submitted to Government by 5th December, 2000. Meanwhile, the Gupta Committee has invited comments/ suggestions through the Press from individuals, professionals, SSI units, extension agencies, organisations, industry associations, etc. by 15th November, 2000.

While it will be a good exercise to feel the pulse in the manner the Committee has decided, it will be also necessary for the Committee to keep in view the core considerations for organisational restructuring, on which various committees set up earlier have aired their views. The first Narasimham Committee on the Financial System (1991) had made the following observations :

“The demands on the financial system in the years ahead would be greater and more diversified.  New skills need to be evolved and new areas of expertise developed.  The financial system is getting more complex and sophisticated, which calls for new concepts of management, more professional decision-making and modernisation of work-systems ……………   The Committee has stressed importance of depoliticising appointments of chief executives and Boards of the institutions and restoring to management of institutions rights over recruitment, rewards and punishment.  This would imply a measure of self-denial by government of its perceived right as an owner to intervene in what should be the internal decision-making of the institutions and distance itself from aspects of internal management and credit allocation.”

In fact, it hardly needs to be emphasised that continuity at top management level, professionalisation of the Board, upgradation of the conceptual and operational skills of the work-force are essential pre-requisites for any organisational re-structuring. The SFCs (Amendment) Act, 2000, does provide for nomination of a director of an SFC as Chairman of the Board in consultation with the State Government, as also appointment of the Managing Director of the SFC by the State Government in consultation with SIDBI. It can only be expected that the chief executive of the State Financial Corporation will not only be picked up through a proper consultative process with SIDBI (the manner and procedure of which is yet to be evolved), but will also be given a reasonable period of a three years’ minimum functional tenure. Also, the concept of corporate governance and prudential standards should sooner than later be introduced and implemented in operationalising SFCs’ performance towards meaningful revitalisation. 

While the  Gupta Committee may be able to come out with their suggestions on the nitty-gritty of sources of recapitalisation/restructuring funding, it is essential to emphasize the required measures for improvement of human capital and knowledge capital of SFCs, besides concentrating on financial capital.  Asset Reconstruction Fund and One Time Settlement (OTS) strategies for cleansing the contaminated assets of SFCs should not be overlooked or ruled out, since recovery efforts of SFCs through invocation of Sections 29, 30, 31 and 32 of the SFCs Act have not been of great utility in bringing a cheerful and healthy loan portfolio profile.  Skill upgradation and career enhancement of personnel of SFCs, besides rightsizing of work-force and speedier shift to state-of-the-art work-technology should necessarily find place in the MoUs that may be drawn up and reached between SFCs and SIDBI/State Government. 

It would be recalled that the SFCs Act, 1951, was enacted with a view to setting up state level financial institutions to provide development banking services to the medium and small-scale industries falling outside the ambit of IFCI’s operations.  Subsequently, by issue of a Government notification on 28.3.1995, the SFCs were declared as Public Financial Institutions (PFI) under Section 4A(2) of the Companies Act, 1956, thus bringing them at par with the same PFI status of ICICI Ltd., IIBI, IDBI, LIC & UTI.  However, while the responsibility of  supervisory and regulatory control of the All-India Financial Institutions is being discharged by RBI, and Board for Financial Supervision (BFS) is being kept apprised of the regulatory/supervisory compliance by  these institutions,  the entire SFCs sector is kept outside the purview of on-site annual supervision by RBI, probably under the assumption that IDBI or SIDBI should take care of this. Since SFCs are also public financial institutions, it is logical to expect that RBI and/or SIDBI should also assume and discharge supervisory responsibilities through acquisition and assumption of necessary statutory provisions and make available the annual supervisory reports, either CAMELS-based or risk-based, to the BFS which should not be deprived of the scope of overseeing compliance of regulatory and supervisory standards by SFCs, a particularly important segment of the accountable public financial sector of the nation. Along with functional autonomy of SFCs, which is now high on the agenda, clear-cut financial health, accountability and disclosure norms for SFCs in meeting prudential standards and internationally known best practices of governance should be attempted to be specified by the Gupta Committee, since autonomy and accountability are only two sides of the same coin.