It was in 1951 that State Financial Corporations Act was passed. In accordance with the provisions of the Act, first Corporation by Punjab Government was set up in 1953. At present there are 18 such corporations.
Capital of the State Corporations:
Each corporation can have a maximum authorised capital of Rs. 5 crores. The shares of the corporation can be purchased by the general public as well. The State Government concerned guarantees a minimum dividend of 3 1/2 per cent on the share capital.
The dividend however, cannot exceed 5 per cent on the share capital. The corporations can augment their resources by floating bonds and debentures. By the end of March 1974, the corporations had issued bonds amounting to Rs. 116 crores. The corporations can borrow from the Reserve Bank of India as well as from the State Governments.
Functions of the State Corporations:
State Finance Corporations provide financial assistance either by way of granting loans or advances or subscribing to debentures of industrial concerns, or by guaranteeing loans raised by industrial concerns or by underwriting the stocks, shares, bonds and debentures. The corporation can assist private limited concerns and partnership firms as well. The loans are granted against mortgaged assets and technical soundness of the project is given foremost consideration while granting loans.
The management of the corporation is run by a Board of Directors. The Managing Director is always appointed by the State Government concerned. State financial institutions are represented by three Directors on the Corporation. The Corporation has advisory committees to assist the Board of Directors for arriving at a decision.
Working of the State Corporations:
The total effective loans disbursed by the Corporations since their inception to the end of 1972-73 amounted to Rs. 37,115 lakhs. In 1973-74 Corporations combined together sanctioned loans amounting to Rs. 99.7 crores. The Corporations had outstanding loans amounting to Rs. 215.3 crores at the end of March 31, 1974. Since then both the sanctions as well as outstanding loans are increasing. Textiles, food products, chemicals, fertilisers and metal Industries received maximum loans. Medium industries were more benefited than small scale industries in grant of loans.
The Corporations have played really an important role in meeting medium term financial needs of medium sized industrial concerns. The Corporations have formulated special schemes for assisting technician entrepreneurs during the course of last few years. They charge a minimum of 7.5% rate of interest on the loans advanced.
Critical Review of the Working of the Corporations:
Though in each state financial Corporation has its own problems, yet on the whole the industry is not satisfied with its working. The Corporations have not done much in underwriting and guaranteeing operations. The management is weak. The cost of borrowing is very high and rate of interest charged not very high but and in fact prohibitive.
Problems of the State Corporations:
1. The default in repayment of loans is very high with the result that the ability to roll over the funds is considerably restricted.
2. Most of the small business units which get loan from the Corporations do not follow accepted principles and practices of accountancy. Thus it becomes difficult to keep watch over the expenditure.
3. While granting loans to small scale industries, peculiar problem faced is that in these industries individuals very much count. An industry which might be running quite efficiently under one man might become inefficient after the death of the same man. Thus continuity of efficient management can hardly be assured. This enhances the difficulties of the Corporations.
4. While granting loans proper securities should be available, but in many cases there are not with the result that Corporations find it difficult to safely advance loans.
5. In order to ensure the return of loan, the Corporation is required to observe certain rules and regulations, but the difficulty is that the industries which approach for getting loans do not appreciate these difficulties and create many problems for the management.
6. The Corporations have no adequately trained staff to provide advisory service to the industry, when a request for financial assistance is received. In case permanent staff is maintained for processing each type of request that will be too costly for the Corporation and ad hoc staff cannot be depended upon.
7. The Corporation lack self-sufficient organisational set up and also specialised trained staff, thus there is no continuity in policy formulation and execution.
8. The Corporations have very limited financial resources, keeping in view the fact that new industries are coming up and more and more requests are being received from these industries for financial assistance.
9. The Corporation has no adequate provision, resources and arrangements to survey backward areas, which have potentialities for growth with the result that their growth suffers.
10. There is overlapping in the activities of state financial Corporations and commercial banks resulting in competition rather than cooperation. The competition creates many complex problems.
11. It is said that same set of rules is applied both in the case of long term as well as short term loans, applied by small scale industries which is unjust.
12. Due to many reasons many industrial units which come forward for loans, are not prepared to give complete information about their actual output and programmes of development, and thus the Corporations find it impossible to have correct assessment of repayment capacity of the industry.
Suggestions for the Improvement of Working:
1. Due place and consideration should be given to the integrity and honesty of the persons applying for the loan, instead of rigid observance of the rules.
2. Conferences of representatives of the Corporations should be periodically convened to exchange ideas on points of common interest and also to enable each Corporation to get benefit of the experience of the others.
3. State governments should provide interest free loans to the Corporations to augment their financial resources.
4. Wastages of money and resources should be located and avoided.
5. Repayment schedule should be so arranged that at the time of repayment small scale and medium industries do not get burdened.
6. More concessions should be given to small scale industries, while granting loans.
7. Dividend requirements should be waived for some time, till Corporations financial resources get augmented.
Reserve Bank of India Working Group Recommendations:
It appears that the State Governments are quite conscious of the difficulties of small scale and cottage industries. The problems have been discussed at the conference of the representatives of the State Financial Corporations. International development Financial Association has promised a $25 million credit in foreign exchange to these Corporations.
The Reserve Bank of India also set up in 1970 a working group to review the working of these Corporations and report of group was made available to the Bank in 1972. The working group recommended augmentation of financial resources of the Corporation and also suggested that scope of assistance of these Corporations should be enlarged. In the opinion of the group management of the Corporation should be strengthened, cost of resources lowered and recovery of loans quickened.
The working group came out with the recommendation that at least 2/3 of the assistance disbursed by the Corporations should go to small units and that dividend obligations should be waived for some time. In 1972 State Financial Corporations Act was amended to enable the Corporations to widen their functional role and to extend geographical coverage.