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State Financial Corporations

Establishment
In order to meet the financial requirements of small scale and medium-sized industries, there was a need of special financial institutions. With this view, the Central Government passed the State Financial Corporation Act of 28th September, 1951 which empowered the state government to establish financial corporation to operate within the state. So far (till now) 18 state financial corporation have been established in different states.

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Objectives
(i) To establish uniformity in regional industries, (ii) To provide incentive to new industries, (iii) To bring efficiency in regional industrial units, (iv) To provide finance to small-scale, medium sized and cottage industries in the state, (v) To develop regional financial resources.

Functions
(i) To provide loans for a period not exceeding 20 years to industrial units. (ii) To underwrite the issue of shares, debentures and bonds for a period not exceeding 20 years of industrial units. (iii) To give guarantee to loans taken by industrial units for a period not exceeding 20 years. (iv) to make payment of capital goods purchased in India by these industrial units. (v) To subscribe to the share capital of the industrial units, in case they wish to raise additional capital. (vi) To do all such acts as may be incidental of its duties under this Act.

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Prohibited Functions
(i) Not to give loan to an industrial unit exceeding 10% of its paid-up capital or Rs. 60,000 whichever is lower. (ii) Not to accept public deposits for a period exceeding 5 years. (iii) Not to accept deposits exceeding the paid up capital. (iv) Not to give loan on the security of its shares. (v) Not to declare dividend on its shares without the sanction of the Central Government. (vi) Not to purchase shares and stocks directly of an industrial unit or limited public company.

Management
State Financial Corporation of every State is Governed by a board of directors consisting of 18 directors in all, duly elected and nominated.

  • Share Capital: The State Financial Corporation can have share capital ranging from Rs. 50 lakhs to Rs. 5 crores. It can be increased up to Rs. 10 crores with the prior sanction of the Central Government.
  • Bond and Debentures: The State Financial Corporation can issue bonds and debentures to a maximum of ten times the amount of its paid-up capital and reserve fund.
  • Public Deposits: The State Financial Corporation can accept public deposits for a maximum period of 5 years. However, the total amount received by way public deposits should not exceed twice its paid-up capital.
  • Other Sources: Borrowings from the state government and the Reserve Bank.

Review of Working Progress (Operations)
By now 18 State Financial Corporations have been established almost in all the states. The 18 state financial corporations in all sanctioned and disbursed a sum of Rs. 31, 172 crores and Rs. 22, 198 crores up to 31st March, 1997. This is evident from the table given below:

Critical evaluation
It has been alleged that the State Financial Corporations are not working in accordance with the financial  needs of the small-scale, medium-sized and cottage industries. The main arguments against their working are- (i) Inadequate Assistance; (ii) Undue delay in sanctioning and disbursing loans; (iii) Indifferent attitude towards new business enterprises; (iv) Absence of financial technical experts; (v) Speed of progress is quite low; (vi) Complex working procedure and full of unnecessary and unwanted formalities; (vii) Shortage of requisite capital; (viii) Difference between loans sanctioned and disbursement is quite large; (ix) Lack of requisite training facilities to employees; and (x) Inadequate underwriting.

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