There are 18 SFCs across the country mandated to serve as Regional Development Banks for promoting industrial growth. These corporations were envisaged to function as Development Financial Institutions (DFIs) mainly for SSIs. Besides term loans for setting up new units, expansion, modernization, etc., of industrial units; they are also mandated to provide equity support wherever needed.
The SFCs set up under the State Financial Corporation’s (SFCs) Act, 1951 have made significant contributions in developing industrial sector including the Small Scale Industry (SSI) Sector in India for well over past five decades. Over the years their activities have expanded considerably. However, with the passage of time, several problems connected with the structure, management and resources have confronted the SFCs.
As such, their overall financial health has reached a critical state, with many of the SFCs having eroded their net worth. With the introduction of financial sector reforms, the business environment for SFCs, as also other players in the financial system became increasingly competitive.
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To enable SFCs to adapt themselves to the emerging environment and promote the growth of the small scale and tiny industries sector in the desired manner, the Government of India (Gol) had enacted amendments to the SFCs in the year 2000 with a view to enlarging their shareholders base, providing them with greater functional autonomy and operational flexibility and enabling them to respond to the needs of the changing financial system.
Alongside the amendments to SFCs Act, a need was also felt to restructure the SFCs for strengthening and revitalizing them. The financial assistance provided by the SFCs is by way of term loan, debentures, etc. Their main resource is refinance provided by SIDBI (earlier IDBI).
Schemes for artisans and specific target groups are formulated which are tailor-made to suit different categories. Under the single window concept, working capital finance is also sanctioned. A study of some of the SFCs revealed huge portfolio of non-performing assets, even though the powers for recovery of dues under section 29 of the SFCs Act empowers them to seize and auction defaulters’ assets.
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Since FY 2004, SIDBI with the support and guidance of the Government of India has taken several steps for revival of these corporations through a tripartite Memorandum, wherein, the concerned State Governments were also made a party, besides SIDBI and the SFC concerned.
The MoU envisaged reschedulement of refinance, cheaper resources support, reduction in interest rate on refinance outstanding, reduction of NPAs, recapitalization, professionalisation, capacity building assistance, risk management, etc.
MoUs were executed with 11 SFCs, majority of which have shown marked improvement in the performance. With the buoyancy in SME sector, these corporations are expected to improve their operations and provide another window of assistance to SMEs in their areas of operations. Out of the remaining corporations, those which are potentially viable are in the process of revival and others have suspended their operations