SFC - State Financial Corporation

download app banner

State Financial Corporations

The State Financial Corporations Act was passed in 1951 which empowered all states and union territories to set up State Financial Corporations to meet the need for financial assistance of micro, small and medium scale industries. These State Financial Corporations provide loans to individual trading concerns, partnership firms as well as private and public limited companies.


There are 18 State Financial Corporations in India at present, from which 17 are established in accordance to the State Financial Corporation Act 1951 and the eighteenth is the Tamil Nadu Industrial Investment Corporation Ltd was formed according to Companies Act 1949. The State Financial Corporation of Punjab was the first Financial Corporation to be set up in the country in 1953. 


The Micro, Small, and Medium Enterprises are of increased importance in India. They form a large part of Rural and Semi-Urban industries and provide employment opportunities to a large number of people. The number of people employed in Small and Medium industries is more as the technique of production is labour-intensive than capital intensive. Due to the high number of employees needed, the SMEs have a huge need for working capital and also fixed capital for installing machinery and such. The State Financial Corporations are set up to meet these requirements of Small and Medium Industries and to provide thrust to the rural economy. 


Functions of State Financial Corporations

The State Financial Corporations are established by the respective state governments aimed at assisting Small and Medium industries. The major functions of State Financial Corporations are- 


1. Long Term Financial Assistance: 

Providing long term financial assistance to finance small and medium industries is the prominent function for which the State Financial Corporations are set up. These enterprises may be in the form of individual proprietorships, partnership firms, private or public companies and the maximum tenure of the loan is twenty years. 


2. Guarantee for Loans: 

The State Financial Corporations also stand guarantee for loans taken by small and medium business concerns from cooperative banks, commercial banks, or any other banking financial institution for a tenure of up to 20 years.


3. Acts as Agents of Government: 

The State Financial corporation also acts as an agent of the state as well as the central government when it comes to implementing government schemes related to small and medium industries financing. The SFCs also disburse loans as per different schemes of the governments. 


4. Underwriting and Subscription: 

The State Financial Corporation also functions as an underwriter by underwriting the shares of small and medium public companies. The SFCs also subscribe to debentures of these small and medium firms which are of tenure of fewer than 20 years. 


5. Credit and Guarantee for Purchases: 

The State Financial Corporation also provides loans and guarantees deferred payment for purchases for the industry like machinery, plant, or any other fixed expenditure. 


Working of (SFC) State Financial Corporations

Each State Financial Corporation is run and led by a board of directors. The board of directors will have 10 members. The board itself is headed by a managing director who is appointed by the state government in consultation with the RBI. The state government also appoints three more directors. All insurance companies, scheduled banks, investment banks, and other quasi-government institutions elect the other three members. Therefore, the majority of director appointments come from the government’s side. 


The maximum paid-up capital of any State Financial Corporation is rupees five crores. The minimum capital is fixed at rupees fifty lakhs. The total capital of the State Financial Corporations is divided into shares and is acquired by the state government, Reserve Bank of India, cooperative banks, other insurance, and financial institutions, and even private parties. 


SFCs can also add to its capacity of funds by issuing debentures and bonds. These instruments will carry a fixed return and can be subscribed to by the public. The issue of such borrowed capital should not exceed five times the paid-up capital and reserve taken together. The maximum amount of reserve that any State Financial corporation can hold is rupees ten lakhs. 


Problems of State Financial Corporations

  • Bad loans are prevalent in State Financial Corporations are quite common as in commercial banks and other financial institutions. The loans are taken by small and medium industries who find it tough to repay the loans which put the State Financial Corporations in a fix.

  • The excessive focus on granting loans is also a problem of State Financial Corporations. The small and medium firms are also in need of other financial services that the corporations do not focus on. 

  • The leniency of the financial corporations to the larger firms is also very common. This will lead to the lack of financial services for smaller firms, which are actually in more need of funds. 

  • As the employees of the financial corporations are appointed by the government via a general eligibility criterion, there is a dearth of specialized technical staff. This leads to a lack of efficiency in the implementation of policies and programs. 

  • One of the most important drawbacks of borrowing funds from the SFCs is the high rate of interest charged by it. This high rate of interest generally puts the small and medium entrepreneurs in a tough position. 

  • The rigorous procedures and formalities to gain a loan from an SFC is also a huge hurdle for businessmen. People find it easier to borrow from commercial banks and other financial institutions. 

  • The limited amount of resources that the SFCs possess is also a menace when it comes to providing the necessary financial services. The SFCs are constrained due to stringent laws curtailing them from acquiring extra capital or even borrowings.

FAQs (Frequently Asked Questions)

1: Are State Financial Corporations Government Institutions?

Ans: Yes, All the State Financial Corporations are either fully or at least partially owned by the State government of the respective states. Those parts of the corporations which are not owned by the government are subscribed for by the RBI, commercial banks, Scheduled banks, cooperative banks, or other financial institutions. The State Financial Corporations are also run by the government or quasi-government forces as the majority members of the financial corporations which actually lead it are appointed by the government and allied institutions. 

2: Are There Any Studies on How the Problems of SFCs Can Be Overcome?

Ans: The Reserve Bank of India set up a working group to review the workings of the State Financial Corporations in 1970. The working group submitted its report in 1972 and is available in the public domain. The working group suggested expanding the resources of the corporations and also increasing the number of financial assistance provided by the corporations. It also called for more power decentralization, lower interest rates, and faster recovery of loans. The State Financial Corporation Act was amended in 1972 according to these recommendations made by the working group.