NEED FOR
STRENGTHENING SIDBI |
The State Financial
Corporations have been passing through a critical phase of trial and
tribulation during the past decade marked by process of liberalisation
and financial sector reforms. It is a well-known fact that the State
Financial Corporations were set up in the country at a time when no
other financial institution existed to promote and finance small scale
and tiny industries in the rural areas and backward regions of the States.
These institutions were not created for profit-maximization, but for
fulfilling certain critical socio-economic obligations like entrepreneurial
development, employment generation, removal of poverty, reduction in
regional imbalances, etc. The SFCs, over a period of more than four
decades, have played a pivotal role in spreading industrial culture
in the far-flung areas of the States and have succeeded to a large extent
in the promotion of first generation entrepreneurs. The present status
of small scale sector in the country today owes a great deal to the
role played by SFCs.
SFCs suffered
a serious setback as a result of ongoing liberalisation and financial sector
reforms since they had to function within the bounds of SFCs Act, while
the commercial banks and other financial institutions were functioning
with greater autonomy and operational flexibility. Therefore, during the
past eight years, the working and financial position of SFCs registered
a steep fall because of their vulnerability to the market forces and their
inability to compete with commercial banks and other financial institutions.
In order to provide a level-playing field to the SFCs, the SFCs Act, which
was passed in 1951, should have been amended to bring it in tune with the
changing business environment. At long last, however, with the sustained
efforts of COSIDICI, the SFCs Act has been amended by the Govt. of India.
The amendments have removed a big legal hurdle in bringing about the desired
reforms in the working of SFCs. The most important amendments relate to
widening and broadbasing the definition of `Industry' and enlarging the
scope of activities of SFCs. Another redeeming feature of these amendments
is a steep hike in the limit of accommodation to an industrial concern.
The amendments, in short, have paved the way for SFCs to function like
all-India financial institutions, provided necessary support is extended
to them from State Governments and SIDBI. Simultaneously, with the amendment
of the SFCs Act, the Govt. of India, Ministry of Finance had set up a High
Level Committee on Restructuring of SFCs. The Committee, headed by Shri
G.P. Gupta, the then Chairman and Managing Director, IDBI, has submitted
its report to the Government. The Committee has made comprehensive recommendations
for recapitalisation and revitalisation of SFCs. If the recommendations
of the Committee, together with amendments in the SFCs Act, are implemented
in letter and spirit, there does not seem to be any reason why the SFCs
should not become vibrant financial institutions and regain their past
glory and lustre.
The Small Industries
Development Bank of India (SIDBI), set up in 1990, was conceived as the
principal financial institution at the apex level for promotion, financing
and development of industry in the small, tiny and cottage sectors. SIDBI
has an overall responsibility for enacting policy and procedural guidelines
with regard to the operations of SFCs. SIDBI has since been de-linked from
IDBI after the SIDBI Act was amended last year and as a result, 51% holding
of IDBI shares in SIDBI are in the process of being transferred to commercial
banks and all-India financial institutions. Further, IDBI's share-holding
in SFCs would also be transferred to SIDBI under the SFCs (Amendment) Act,
2000. All the discretionary powers hitherto vested with IDBI in the principal
Act, now vest with SIDBI under the amended Act. SIDBI under the new dispensation
has been entrusted with the overall responsibility to look after the interests
of SFCs, including provision of adequate refinance facilities. The success
of the reforms brought about by the amendments in the SFCs Act, as also
the recommendations of the High Level Committee, would largely depend upon
the responsiveness of SIDBI to the needs and aspirations of SFCs. This,
undoubtedly, calls for strengthening SIDBI organisationally and financially
to cope with this responsibility and meet the genuine refinance requirements
of SFCs.
The operational
limits prescribed under various provisions of the amended Act could be
increased by the State Governments on the recommendations of SIDBI keeping
in view the business requirements of SFCs. These limits relate to augmentation
of share-capital base, borrowings from outside agencies, including floatation
of bonds and debentures, limit of accommodation to industrial units, eligibility
of industrial units to borrow from SFCs in terms of owned-funds, etc. etc.
Since limit of accommodation to individual units has been increased to
Rs.5 crore and Rs.2 crore in the case of companies and individuals respectively
with a provision to increase it further to Rs.20 crore and Rs.5 crore respectively
on the recommendations of SIDBI, the SFCs were now in a position to finance
comparatively bigger industrial units having large credit requirements.
Consequently, the refinance requirements of SFCs have gone up substantially
and they have started approaching SIDBI for meeting their requirements.
In terms of the Act, SFCs cannot finance industrial units whose owned-funds
exceed Rs.10 crore. This limit could be increased to Rs.30 crore by the
State Government on the recommendation of SIDBI. The SFCs, while approaching
SIDBI for enhanced refinance limit, have also requested them to recommend
the increase in this threshold limit to the State Government to enable
them to avail of these relaxations. It has, however, been noticed that
the response from SIDBI to the above request being made by SFCs has not
been encouraging. SIDBI is reported to have expressed its reservations
to increase the refinance limits as also enhancement in the level of owned-funds
of the borrowing units. The reluctance on the part of SIDBI to release
adequate refinance to eligible SFCs to enable them to finance medium scale
industrial units appears to be retrograde step and tends to defeat the
very purpose of enhancing the accommodation limit. In the absence of adequate
availability of refinance from SIDBI and inability of SFCs to mobilize
their own resources, the present trend of industrial units going away from
SFCs to commercial banks and other financial institutions would continue
unabated to the detriment of SFCs' interest.
Since the
SFCs have been conceived as institutions of national importance engaged
in the strategic task of promoting industrialisation in the rural and backward
regions of the States, SIDBI and the State Governments must provide required
support to enable them to play their envisaged developmental role in the
national economy.
(
K.K. MUDGIL )
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