State Financial Corporations - Development Banks, Indian Financial System Notes | Study Indian Financial System - B Com

In order to meet the financial needs of small and medium scale industrial units which are not governed by Industrial Finance Corporation, the Government of India passed State Finance Corporation Act in 1951, empowering the State Governments to start financial corporations. The First State Financial Corporation was set up in Punjab in the year 1953. At present there are 18 SFCs operating in the country.

Functions of SFCs

Following are the various functions of SFSs

1. Financial Assistance to Small Units : The main function of State Finance Corporations is to provide long term finance to small and medium scale Industrial concerns formed as public or private limited companies, corporations, forms or proprietary concerns repayable with in a period of 20 years.
2. Guaranteeing Loans : The SFCs guarantee loans raised by industrial concerns from commercial banks and cooperative banks repayable within a period of 20 years.
3. Subscription and Underwriting : The State Finance Corporations subscribes to the debentures issued by the industrial concerns repayable within 20 years and also underwrites the issue of stock, shares, bonds and debentures of industrial concerns.
4. Guarantee for deferred Payments : They guarantees the deferred payments for the purchase of plant, machinery etc within the country.
5. Acting as Agent of Central and State Governments : They act as an agent of the central or state governments or some industrial financing institutions for sanctioning and disbursing loans to small industries. 
6. Capital : The share capital of the SFCs is fixed by the concerned state government subject to the minimum of Rs. 50 lakhs and maximum of Rs. 5 crore. The shares are subscribed by the State Government, RBI, Commercial Banks, Co-operative banks, other financial institutions and the public.

List of SFCs in India

1. Andhra Pradesh State Financial Corporation
2. Assam Financial Corporation 
3. Bihar State Financial Corporation
4. Delhi Financial Corporation
5. Haryana Financial Corporation
6. Gujarat State Financial Services Ltd.
7. Hirnachal Pradesh Financial Corporation
8. Jammu & Kashmir State Financial Corporation
9. Jammu & Kashmir State Financial Corporation
10. Kerala Financial Corporation
11. Madhya Pradesh Financial
12. Maharashtra State Financial
13. Orissa State Financial
14. Punjab Financial Corporation
15. Rajasthan Financial Corporation
16. Tamil Nadu Industrial
17. Uttar Pradesh Financial Corporation
18. West Bengal Financial Corporation

Critical Review

The functioning of State Finance Corporations has been criticized mainly because of the following drawbacks.

1. Concentration only on Granting Loans : Concentration only on sanctioning of loans and advances even though they can subscribe to the debentures and underwrite shares and debentures issued by the units. Therefor,e there is a need for reorientation of the lending policy.
2. Failed to Achieve Regional Balanced Growth : State Finance Corporations have failed to bring about a regional balanced industrial growth. It is observed that there has been uneven development of industries with State Finance Corporations assistance in different states and regions.
3. Bias in Favor of Large Unites : State Finance Corporations shown a bias in favor of financing large scale units rather than to small scale units. 
4. Higher Rate of Interest : High rate of interest and hard terms and conditions for assistance is another criticism against the operations of SFCs.
5. Problem of Overdues : Most of the SFCs are facing the serious problem of continuous increasing magnitude of overdues due to delay in implementation of projects.
6. Lack of Technical Staff : Lack of adequate specialized technical and trained staff for efficient working.
7. Lack of Self Sufficient Organizational setup : The SFCs lack self-sufficient organizational set up along with adequate specialized and trained staff ensuring their efficient functioning.
8. Limited Resources : The financial resources of the SFCs are limited and inadequate. They are facing problem of attracting more funds.