State Financial Corporations

Industrial Finance Corporation of India was set up in 1948 to cater to the needs of large industrial concerns. It can render financial assistance only to limited companies and co-operative societies. After independence the Government of India realised the need for financial institutions at the state level to assist the promotion and expansion of medium and small-scale industries. The State Financial Corporations Act was born out of this need in 1951. The Act was amended in 1956 and 1962. The State Governments were empowered by the Act to establish financial corporation in their respective regions to foster and stimulate the development of medium and small scale industries.

Functions: The State Financial Corporations are empowered to render financial help in the following forms:

(a) Granting loans and advances to or subscribing to the debentures of industrial concerns repayable within 20 years.

(b) Guaranteeing loans raised by industrial concerns repayable within 20 years.

(c) Underwriting the stocks, shares, debentures, subject to their being disposed off in the market within 7 years.

(d) Guaranteeing deferred payments due from industrial concerns on their purchases of capital goods in India.

(e) Granting soft loans to or participating in the equity of the weaker segments of the medium and small-scale sector.

The State Financial Corporations can grant assistance to public limited companies, partnerships and proprietory concerns. The assistance given to a single concern should not exceed 10% of the paid up capital of the corporation or 15 lakhs whichever is less. The limit is raised to 30 lakhs in the case of limited companies and co-operative societies.

Management: The State Finance Corporation is managed by a Board of Directors.

The board consists of 10 members of which three are nominated by the State Government concerned, one by the Reserve Bank of India, one by the I.F.C. and the remaining four are elected by bank, and insurance companies. One member of the board is appointed as the Managing Director.

Resources: State Financial Corporations can raise finance by the following methods:

(a) Share Capital: The capital structure of a State Finance Corporation is fixed by the State Government concerned. It is subject to a minimum of Rs. 50 lakhs and a maximum of Rs. 5 crores. Initially the share capital is to be contributed by the State Government concerned, Reserve Bank of India, Co-operative banks and Insurance

companies in a predetermined ratio. Not more than 25% of the share capital may be allotted to the public. The shares are to be guaranteed by the State Government with regard to both principal and interest. With effect from February 1976 the holding of the RBI in SFCs were transferred to IDBI. The rate of dividend should not exceed 5 per cent per annum.

(b) Bonds and Debentures: The corporations are empowered to issue bonds and debentures to supplement their resources. The amount raise through this source should not exceed ten times the amount of their paid-up capital and reserve fund.

(c) Public Deposits: The corporations are also empowered to accept public deposits for a period of not less than five years. However, the amount of deposits should not exceed the paid up capital of the corporation.

(d) Borrowings: The corporations can also borrow from the Reserve Bank, the IDBI and the State Government concerned. Borrowings from IDBI account for nearly one third of the total resources.

Working: During the last five decades the SFCs have played a significant role in the development of medium and small-scale industries. The following facts and figure speak of their performance and achievements:

(a) There are at present 18 corporations including the Tamil Nadu Industrial Development Corporation. The loans sanctioned from 1971 and 1997 amounted to Rs. 31170 crores. Over 70% of the total assistance sanctioned by all SFC’s is provided to small-scale industries. In 1999-2000, the total assistance sanctioned and disbursed by 18 SFCs stood at Rs. 2,231 crores and Rs. 1,730 crores respectively.

(b) The corporations have directly subscribed to the share capital of a number of companies.

(c) The corporations have also provided guarantees for deferred payments by industrial units for purchase of capital goods.

(d) In recent years, there has been some welcome change in the attitude of SFCs towards the small-scale industries and units in backward areas. The assistance sanctioned and disbursed to the units in these areas is gradually increasing.

(e) The corporations have provided financial assistance on very liberal scale to a number of technical entrepreneurs.

(f) The corporations have also advanced loans in foreign currency for import of capital goods.

(g) Some of the corporations have conducted area surveys and prepared project reports to promote industrial development in backward area.

Critical Review of the Working of SFCs: The SFCs played a significant role in meeting the medium term financial needs of small and medium-scale industries. Food processing, road transport, chemicals, textiles, metal products, machinery and transport equipment industries have been the major beneficiaries of SFC’s assistance.

Development Banks 147

The following are some of the difficulties and limitations faced by the corporations and the suggestions made to solve them:

(a) A major problem of the SFCs is the magnitude of overdues. The default ratio has been increasing, with the result suits filed for recovery of dues are also increasing.

There is need to keep a continuous watch on the assisted units.

(b) The financial position of the assisted units needs periodical review and analysis.

Assisted units should be compelled to maintain proper books of accounts and not mix up personal accounts with business accounts.

(c) Many firms are not able to offer adequate security for the loans because of defects in titles to property. Further they do not have the resources to fulfil the conditions for the grant of loans.

(d) The units seeking assistance are not familiar with the procedures and formalities to be gone through to get the loans sanctioned.

(e) The corporations should formulate a sound investment policy and maintain healthy investment portfolio. Loans should be sanctioned only after the economic viability of the projects is proved beyond doubt. However there is dearth of technical personnel to examine the soundness of proposed schemes. This deficiency should be set right.

(f) Paucity of funds is one of the major constraints of these corporations. The public response to capital issues of these corporations is not encouraging on account of the low rate of divided and non-marketability of shares. The corporations should issue shares and bonds with attractive terms and rate of interest.

(g) The corporations should pay more attention for the development of industries in backward areas. They should undertake area surveys for preparation of project for industries having development potentialities.

(h) Steps should be taken to see that assistance given is properly utilised. The corporations should not hesitate to take over the management of defaulting concerns, if it is necessary.

(i) Though the rates of interest charged by the corporations are quite reasonable, the cost of borrowing is high for the industrial units on account of high stamp duty, registration fee etc. The State Government should grant some concession in these charges.

Recently some measures have been taken to streamline these corporations and co-ordinate their activities with other financial institutions engaged in industrial finance. The corporations are acting as agents of their respective State Governments for routing funds under the liberalised scheme of assistance to small-scale industries.

The SFCs are the prime sources of block finance to small and medium scale industries.

They should adopt a number of measures, as the commercial banks did to increase their volume of assistance to small scale units. Setting up of separate cell to look after the needs of the small scale units, adoption of some selected districts for intensive operations, conducting surveys to identify industrial potential are some of the measures suggested to make the corporations play a more effective and constructive role in the process of industrial growth.