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Assignment of Mgt(317) TOPIC- State financial corporation

Submitted to:- richa mam Nisha

Submitted by:Shwet Roll- A12

10901787

Reg no:-

MBA(dual)

BBA-

Introduction

A central Industrial finance corporation was set up under the industrial Finance Corporation Act 1994.

In order to provide medium and long term credit to industrial under takings which fall outside normal activities of commercial banks.

The state government expressed their desire that similar corporation be set up in state to supplement the work of Industrial financial Corporation.

State government also expressed that the state corporation be established under a special statue in order to make it possible to incorporate in constitution necessary provision in regard to majority control by the government guaranteed by the state government in regard to the payment principal. In order to implement the view expressed the state governments the State financial corporation bill was introduced in the parliament.

Statement of object and reasons

In order to provide medium and long term credit to industrial undertaking which fall outside the normal activities of commercial banks. A central industrial finance corporation was set up under the industrial finance Corporation act, 1948.

The state government wished that similar corporation should be set up their states to supplement the work of industrial Finance Corporation.

The intention is that the State Corporation will confine to financing medium and small scale industrial and will, as far as possible the preview of Finance Corporation.

The main feature of the state financial corporation act 1951.

 The bill provides that the state government may by notification in official gazette, established a financial corporation state.

The share capital shall be fixed by state government but shall not exceed Rs 2crore. The issue of share to public will limited to 25% of the share capital and the rest will be held by the state Governments.

Shares of corporation will be guaranteed by the state government as to the re- payment of principal and payment of minimum dividend to prescribe in consultation with the central government.

The corporation will authorised to issue bonds and debenture for amount which together with the contingent liabilities of the corporation shall exceed five- times the amount of the paid- up share capital and the reserve fund of the corporation. T h e c o r p o r a t i o n w i l l m a n a g e d b y b o ar d c o n s i s t i n g o f majority of director nominated by state governments. F i n a n c i a l r e s o u r c e s of t h e S F C s The SFCs mobilize their financial resources from the followings. their own share capital income from investment and repayment of loans sale of bonds loan from IDBI (to some extent) borrowing from Reserve Bank of India deposits from Public Loans from state Governments

In the act Financial Corporation are established under section 3 and include a joint financial corporation act of 1951. The act applies to industrial concern means any construction engaged in the manufacturing, preservation or processing of goods. The mining or development of mines.

 The hotel industry. The setting and development of industrial areas industrial state. Fishing or providing shore facilities for fishing or maintenance. Development maintenance and construction of roads. Tissue culture, fish culture poultry farming, breeding and hatcheries Research and Development of any concept, technology, design process or product , whether in relation to any of the matters including any activities approved by the Small Industrial Bank State Financial Corporation .

Broad function of State Financial Corporations.

Specific function of SFCs

The SFCs while giving the loan to industrial units see to it that loans are secured by a PLEDGE, MORTAGAGE, HYPOTHECATION O f m o v a b l e a n d i m m o v a b l e p r o p e r t y or o t h e r t a n g i b l e a s s e t s or g u a r a n t e e b y t h e s t a t e g o v e r n m e n t or scheduled commercial bank , they also accept personal pledge by the entrepreneur . SFCs do not give loans on t h e b a s i s o f s e c o n d m or t g a g e . Grant loans or advances to industrial concern repayable within a period not exceeding 20 years. Providing guarantee for loans raised by industrial units from commercial banks and state cooperative banks. P r o v i d i n g g u a r a n t e e f o r d e f er r e d p a y m e n t s i n c a s e s w h e r e i n d u s t r i a l u n i t s h a v e p ur c h a s e d c a p i t a l g o o d s o n a deferred payment basis. Guarantee loans raised by industrial concerns which are re- payable within a period not exceeding 20 years and which are floated in the public market

SFCs grant loans to industrial units for the purchase of fixed capital assets like land, machinery. In some exceptional cases, some SFCs also provide loans for working c a p i t a l requirements in combination with loans for fixed capital.

SFCs however are prohibited from subscribing directly to the shares or stock of any company having limited l i a b i l i t y e x c e p t f o r u n d e r w r i t i n g p ur p o s e s a n d g r a n t i n g a n y loans or advance on the security of its own shares S F C s Contributory to development of small scale industries in the Indian economy There are at present 18State financial Corporations and a l m o s t e v e r y s t a t e h a s a f i n a n c i a l c o r p or a t i o n o f i t s o w n . During 2000-2001 SFCs had sanctioned loans aggregating to 2800 corers and disbursers 2 0 0 0 c r or e s . Attempts are now being made to strengthen the role of SFCs as regional development banks. The SFCs sanctioned seed capital assistance under the seed capital schemes introduced and operated by IDBI. This assistance is available to promoters of small business units. Since June 1989, SFCs h a v e a l s o b e e n i m p l e m e n t i n g s p e c i a l s c h e m e s of seed capital assistance to women entrepreneurs. Assistance i s e x t e n d e d i n t h e f o r m o f l o a n or g r a n t o r a c o m b i n a t i o n o f b o t h t o v o l u n t a r y a g e n c i e s w o r k i n g f or w o m e n i n decentralized industries.

Growth of microfinance
The growth of microfinance is visible in many aspects. There are more than 2000 NGOs involved in the NABARD SHG-Bank linkage program. Out of these, approximately 800 NGOs are involved in some form of financial intermediation. Further, there are 350 new generation co-operatives providing thrift and credit services. According to our estimate, the present total outstanding, including Sa-Dhan members and bank linkages is approximately Rs.700 crores (Rs. 150 crores of Sa-Dhan members and another Rs. 550 crores from the Banking system). The total client base is estimated at 6-8 million as opposed to the Government of India (GOI) intention to reach 25 million clients. The growth of community institutions has taken place with the role to take

social and financial intermediation. A numbers of community banks have come into existence at village and block levels call ' Federation of Self Help Groups'.

The inadequacies of the formal financial system to cater to the needs of the poor and the realization of the fact that the key to success lies in the evolution and participation of community based organizations at the grassroots level led to the emergence of new generation of MFIs.

One kind of MFI is an NGO engaged in promoting Self Help Groups (SHGs) and their federations at a cluster level and linking SHGs with Banks under the Scheme. Examples are Myrada in Karnataka, which has promoted Sanghmitra, a company of its village saving and credit sanghas, PRADAN which has established a large number of SHGs and federated them under Damodar in Bihar, Sakhi Samiti in Rajasthan.

Another kind is NGO-MFI directly lending to the poor borrowers, who are either organized into SHGs or into Grameen Bank type of groups after borrowing bulk funds from SIDBI, RMK and FWWB. Examples in this category are Rashtriya Gramin Vikas Nidhi (RGVN) which runs credit and savings programme in Assam and Orissa on the lines of Grameen Bank, Bangladesh. Also we have SHARE in AP, ASA in Tamil Nadu under this category.

There are MFIs which are specifically organized as cooperatives, such as over 500 Mutually Aided Cooperative Thrift and Credit Socities (MACTS) in AP, promoted among others by Cooperative Development Foundation (CDF) and the SEWA Bank in Gujarat which also runs federations of SHGs in nine districts.

Then we have MFIs, which are organize as Non-Banking Finance Companies (NBFC) such as BASIX, CFTS Mirzapur, SHARE Microfin. Ltd and Sarvodaya Nanofinance Ltd.

Expansion Path of MFIs Government of Indias task force on financial services in Bihar (Planning Commission, 2007) notes that in order to achieve meaningful ubiquity, models of outreach must have ability to leverage local information while being costeffective. A two-pronged strategy to deliver comprehensive financial services would include (i) Supporting existing MFIs with a successful microfinance model and (ii) building technology enabled low cost direct service channels. These direct service channels would complement services provided by the MFIs. To address the issue of capacity building in microfinance institutions, RGVN and BASIX are incubating small NGOs/ MFIs through capacity building inputs and initial working capital. RGVN has supported more than 50 NGOs/MFIs. Most of the top local MFIs in the State had availed their initial funding support from RGVN. BASIX is also assisting the emerging microfinance institutions in Bihar to develop their MIS to carry out microfinance activities with greater efficiency. Despite the expansion of activities of a few leading NGOs drawing upon funds from the Rashtriya Mahila Kosh and other wholesalers and incubation efforts of RGVN, MFI channel has so far seen a limited development. Most of the State level MFIs have started their microfinance operation in last couple of years and require more attention in terms of fund requirement and capacity building support services to make significant outreach. However the Multi-State MFIs such as SKS, Cashpor, ASSEFA/Sarvodaya Nanfinance and Bandhan are not facing much resource crisis and are growing at a faster pace. This is already reflected in the number of their clientele which was nearly 200,000 or about 80% of total in March 2008 (refer Chart 4.2). Among local MFIs, NIDAN and GJKP have more than 10,000 clients. By October 2008 SKS had already reached 1,20,000 clients and Bandhan, 23,000 clients in the current year alone. It is likely that flow of resources through this channel will in 2008-09 have outstripped the bank credit provided through SHGs and MFIs in the coming years will be the major source of microfinance to the poor. The

Innovation by SFCs

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Conclusion
State financial corporation have not been able to become popular due to poor implementation and poor investment that they have undertaken as they invest in small scale industries the return will be lower as gestation period for small scale industries is very long. Losses are bound occur but as a business and financial organisation the government and the state must find ways of minimising profit which can be recycled back to promote SFCs. Business decisions must be taken with a purely business perspective in mind and political, emotional factor should not play the major factor while making business decision.