State Financial Corporations (SFCs) are the financial institutions that were set up by the state governments in India, post-Independence. The objective was to provide credit and other support services to small businesses and farmers. However, over time, SFCs have diversified their operations and now offer a range of products and services such as capital market operations, venture capital funding, insurance, etc. In this article, we take a brief look at the history and role of SFCs in India’s economy.

State Finance Corporation

The State Finance Corporations (SFCs) are a vital component of a country’s institutional finance architecture. The SEC promotes small and medium-sized enterprises in the states, whereas SFC assists in promoting balanced regional development, increased investment, more employment generation, and broad industry ownership.

At present, there are 18 state finance corporations in India (out of which 17 are SFCs, according to the SFC Act 1951). Tamil Nadu Industrial Investment Corporation Ltd. is a state finance corporation incorporated under the Company Act, 1949.

Organisation and Management

The State Finance Corporations are run by a Board of ten directors, which are appointed by the state government. In general, the managing director is chosen in consultation with the RBI and named by three other directors by the state government.

Three directors are elected by all types of insurance companies, scheduled banks, investment trusts, cooperative banks, and other financial organisations. As a result, the state government and quasi-government bodies select the vast majority of directors.

Functions of SFCs

The various important functions of State Finance Corporations are:

  • The SFCs finance fixed assets, such as land, construction, equipment, and machinery.
  • The SFCs assist industrial companies that have paid-up capital and reserves of less than Rs. 3 crore (or such a higher limit as may be determined by the central government).
  • The SFCs guarantee new industrial units’ stock, shares, debentures, and other instruments.
  • The SFCs offer guarantee loans to scheduled banks, industrial enterprises, and state cooperative banks that have raised funds on the capital market. The loans are payable in 20 years and guaranteed by the SFCs.
  • The SFCs also refinance term loans of up to Rs. 20 lakh from other financial institutions.
  • The SFCs help small and medium enterprises by providing loans for the purchase of plant and machinery, equipment, tools, etc.
  • The SFCs also offer venture capital funding to small and medium enterprises.
  • The SFCs provide term loans to sick units for rehabilitation purposes.
  • The SFCs also undertake developmental activities such as establishing industrial estates, providing infrastructure facilities, etc.

Problems of SFCs in India

  • The SFCs have been plagued by several problems in recent years, which have led to their declining role in the Indian economy. Some major problems faced by SFCs are:
  • The SFCs have a high proportion of non-performing assets (NPAs), which has eroded their capital.
  • The SFCs are highly dependent on the state government for capital infusion, which is often not forthcoming promptly.
  • The SFCs have been hit hard by the recent economic downturn, as many of their borrowers are small businesses and farmers who have been adversely affected by the slowdown.
  • The SFCs are also facing competition from newer players such as NBFCs and microfinance institutions, which are better equipped to serve the needs of small businesses and farmers.
  • As a result of this, most SFCs in India are connected to the World Bank and WTO rules. These organisations’ choices are thus influenced by the World Bank and WTO policies as a result of their agreements. The World Bank has a lot of power over India since it is the largest development financier in the world. It can easily push for its ideas to be implemented. It may also have a detrimental impact on India’s small-scale industry.

 Working of SFCs

In 1951, the Indian government passed a law known as the State Financial Corporation Act. It applies to all of India’s states.

The authorised capital of a state financial corporation must be within the lower and higher limits of Rs. 50 lakhs and Rs. 5 crores set by the state government.

The Reserve Bank of India (RBI) and scheduled commercial banks divided the market into shares of equal value acquired by each state government, the Ministry of Finance, the RBI, scheduled commercial banks, co-operative banks, other financial institutions such as insurance companies, investment trusts, and private parties.

The shares of SFCs are guaranteed by the government. The SFCs may also raise money through issues and sales of bonds and debentures, which must not exceed ten times the capital and reserves at Rs. 10 lakh.

Prospects of SFCs

Special Help to Women Entrepreneurs: Various state financial organisations, such as the Delhi SFC, provide women entrepreneurs with a new scheme in their state. This is a very creative method for the development of women by a state financial institution.

Highest loan provider for small-scale industry: There may also be a good possibility that these organisations have granted more than Rs. 6300 crore in loans to the small-scale industry in 2010.

Industrial research: SFCs have provided financial services to the Indian population for more than 59 years. As a result, these financial institutions have a vast amount of industrial data. If an entrepreneur wants to start a new business, he or she may contact these organisations to begin his or her industrial research.

Conclusion

In Conclusion, the role of State Financial Corporations has been very important in the development of small businesses and industries in India. However, these organisations have been facing several problems in recent years, which have led to their declining role in the Indian economy.