The State Financial Corporations have been passing through a critical phase of trial and tribulation during the past decade marked by process of liberalisation and financial sector reforms. It is a well-known fact that the State Financial Corporations were set up in the country at a time when no other financial institution existed to promote and finance small scale and tiny industries in the rural areas and backward regions of the States. These institutions were not created for profit-maximization, but for fulfilling certain critical socio-economic obligations like entrepreneurial development, employment generation, removal of poverty, reduction in regional imbalances, etc. The SFCs, over a period of more than four decades, have played a pivotal role in spreading industrial culture in the far-flung areas of the States and have succeeded to a large extent in the promotion of first generation entrepreneurs. The present status of small scale sector in the country today owes a great deal to the role played by SFCs.  

SFCs suffered a serious setback as a result of ongoing liberalisation and financial sector reforms since they had to function within the bounds of SFCs Act, while the commercial banks and other financial institutions were functioning with greater autonomy and operational flexibility. Therefore, during the past eight years, the working and financial position of SFCs registered a steep fall because of their vulnerability to the market forces and their inability to compete with commercial banks and other financial institutions. In order to provide a level-playing field to the SFCs, the SFCs Act, which was passed in 1951, should have been amended to bring it in tune with the changing business environment. At long last, however, with the sustained efforts of COSIDICI, the SFCs Act has been amended by the Govt. of India. The amendments have removed a big legal hurdle in bringing about the desired reforms in the working of SFCs. The most important amendments relate to widening and broadbasing the definition of `Industry' and enlarging the scope of activities of SFCs. Another redeeming feature of these amendments is a steep hike in the limit of accommodation to an industrial concern. The amendments, in short, have paved the way for SFCs to function like all-India financial institutions, provided necessary support is extended to them from State Governments and SIDBI. Simultaneously, with the amendment of the SFCs Act, the Govt. of India, Ministry of Finance had set up a High Level Committee on Restructuring of SFCs. The Committee, headed by Shri G.P. Gupta, the then Chairman and Managing Director, IDBI, has submitted its report to the Government. The Committee has made comprehensive recommendations for recapitalisation and revitalisation of SFCs. If the recommendations of the Committee, together with amendments in the SFCs Act, are implemented in letter and spirit, there does not seem to be any reason why the SFCs should not become vibrant financial institutions and regain their past glory and lustre.  

The Small Industries Development Bank of India (SIDBI), set up in 1990, was conceived as the principal financial institution at the apex level for promotion, financing and development of industry in the small, tiny and cottage sectors. SIDBI has an overall responsibility for enacting policy and procedural guidelines with regard to the operations of SFCs. SIDBI has since been de-linked from IDBI after the SIDBI Act was amended last year and as a result, 51% holding of IDBI shares in SIDBI are in the process of being transferred to commercial banks and all-India financial institutions. Further, IDBI's share-holding in SFCs would also be transferred to SIDBI under the SFCs (Amendment) Act, 2000. All the discretionary powers hitherto vested with IDBI in the principal Act, now vest with SIDBI under the amended Act. SIDBI under the new dispensation has been entrusted with the overall responsibility to look after the interests of SFCs, including provision of adequate refinance facilities. The success of the reforms brought about by the amendments in the SFCs Act, as also the recommendations of the High Level Committee, would largely depend upon the responsiveness of SIDBI to the needs and aspirations of SFCs. This, undoubtedly, calls for strengthening SIDBI organisationally and financially to cope with this responsibility and meet the genuine refinance requirements of SFCs.  

The operational limits prescribed under various provisions of the amended Act could be increased by the State Governments on the recommendations of SIDBI keeping in view the business requirements of SFCs. These limits relate to augmentation of share-capital base, borrowings from outside agencies, including floatation of bonds and debentures, limit of accommodation to industrial units, eligibility of industrial units to borrow from SFCs in terms of owned-funds, etc. etc. Since limit of accommodation to individual units has been increased to Rs.5 crore and Rs.2 crore in the case of companies and individuals respectively with a provision to increase it further to Rs.20 crore and Rs.5 crore respectively on the recommendations of SIDBI, the SFCs were now in a position to finance comparatively bigger industrial units having large credit requirements. Consequently, the refinance requirements of SFCs have gone up substantially and they have started approaching SIDBI for meeting their requirements. In terms of the Act, SFCs cannot finance industrial units whose owned-funds exceed Rs.10 crore. This limit could be increased to Rs.30 crore by the State Government on the recommendation of SIDBI. The SFCs, while approaching SIDBI for enhanced refinance limit, have also requested them to recommend the increase in this threshold limit to the State Government to enable them to avail of these relaxations. It has, however, been noticed that the response from SIDBI to the above request being made by SFCs has not been encouraging. SIDBI is reported to have expressed its reservations to increase the refinance limits as also enhancement in the level of owned-funds of the borrowing units. The reluctance on the part of SIDBI to release adequate refinance to eligible SFCs to enable them to finance medium scale industrial units appears to be retrograde step and tends to defeat the very purpose of enhancing the accommodation limit. In the absence of adequate availability of refinance from SIDBI and inability of SFCs to mobilize their own resources, the present trend of industrial units going away from SFCs to commercial banks and other financial institutions would continue unabated to the detriment of SFCs' interest.  
Since the SFCs have been conceived as institutions of national importance engaged in the strategic task of promoting industrialisation in the rural and backward regions of the States, SIDBI and the State Governments must provide required support to enable them to play their envisaged developmental role in the national economy.