THE ECONOMIC WEEKLY November 5 , 1 9 6 0

State Financial Corporations H V V o h r a

T H E establishment o f State Firm-cial Corporat ions was, one of the

steps taken, at the official level to promote the growth of small and medium-scale industries. The Cor­porations were formed under the State F inanc ia l Corporat ions Act , 1951, the o n l y exception being the Madras Indus t r ia l and Investment Corporat ion which was formed in 1949, long before the State Financia l Corporations Act , 1951, came in to force. At present there is a Corpora­t ion in each of the fifteen Slates of the Ind ian Un ion , i n c l u d i n g Jammu and Kashmir . The Corporat ions were established at different dates, begin­n ing w i t h the Punjab State Finan­cial Corporat ion w h i c h came into existence early in 1953. The latest to appear on the scene have been the Corporat ions in Jammu and Kash­mi r , Mysore and Gujarat . which were established in 1960 on ly .

The State F inanc ia l Corporat ions were set up for the purpose of meet-ing the long-term financial require­ments of small and medium indus­tries by p r o v i d i n g credit to them. As more than eight years have passed since the first of the State Financial Corporat ions was established in the Fast Punjab in February. 1953, and almost a l l the corporat ions, except the three mentioned above, are at least five years o ld , it is not too ear ly to make an assessment of their performance.

TWO CRITERIA

T w o types of cr i ter ia might be applied for making such an apprai ­sal. On the one hand, the perfor­mance of these inst i tut ions may be evaluated in terms of the actual amount of financial assistance ex­tended by them, on the other hand it may be judged by the yardstick of the profi t earned by them, w h i c h would measure the extent to wh ich they have become self-supporting. It may be mentioned that a m i m m u i m div idend on the shares of these Corporat ions is guaranteed by the respective State Governments wh ich are bound to assist them whenever their prof i t s are not sufficient fo r pay ing the guaranteed d iv idend . Th i s is done in the f o r m of sub­vention wh ich the State Governments give to the Corporat ions. The amount of subvention received by

a Corpora t ion thus becomes a l i ab i ­l i t y on i t to be l iqu ida ted when­ever its earnings enable it to do so.

In this art icle, at tention is con­centrated on the assistance rendered by the Corporat ions to various, indus t r ia l units. The results of their f inancial w o r k i n g are touched upon only b r i e f ly . The study is based on the in fo rma t ion given in the annual reports of the Corporat ions. The three new Corporat ions of Jammu and Kashmir , Mysore and Gujarat have been excluded f rom the pur­view of the study. The Orissa Finan­cial Corpora t ion has also not been included because its annual report was not available to the wri ter . The in fo rmat ion relat ing to the Bombay Stale Financial Corporat ion per-tains to the p re bi furcated Bombay State.

Since the Corporat ions advance loans repayable over a per iod of 10 or 12 years — the statutory l i m i t being 20 years — the process of payment of loans to borrowers and of repayment of loans by the bor­rowers to the Corporat ions is conti­nuous. Na tu ra l ly , the amount of loans shown as outstanding in any par t icular balance-sheet is a r r ived at after t ak ing into consideration the amounts repaid -during the year. The amount of assistance rendered by the Corpora t ion is, however, i n d i ­cated not by the outstanding loans but. by the aggregate amount of loans disbursed over a pe r iod of t ime. Whi le , a par t of this amount w o u l d have been repaid at the end of any per iod, the a id given to the industr ia l units w i l l remain either in the f o r m of block assets newly ac­qui red , renovated or repaired ( i n case of loans given for this purpose) or in the f o r m of increased financial strength where the loans were to be util ised as w o r k i n g cap i ta l .

I t w i l l be seen f r o m Table 1. which gives figures of the- assistance rendered by the various corporat ions that the total amount of loans dis­bursed by al l the Corporat ions t i l l M a r c h 3 1 , 1960 was Rs 17,37 cro-res. The total loanable resources of a l l the Corporat ions on that date amounted to Rs 21.48 crores. Thus the Corporat ions have ut i l i sed 80,8 per cent of the i r resources fo r pro­v i d i n g f inance to indus t r ia l units.

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This appears to be reasonably satis­factory and it m igh t be said that they have fu l f i l l ed their purpose to a large extent.

L O A N S A N D R E Q U I R E M E N T S

However, it is pert inent to ask how far the Corporat ions have been able to meet the requirements of smal l and med ium industries. In other words what is the p r o p o r t i o n of the actual assistance rendered to the total help requi red? W h i l e there is no way of calculat ing the finan­c ia l requirements of these industries as such, the amount of loans asked for f r o m the Corporat ions may be taken as a rough ind ica t ion of the requirements of at least those indus­t r i a l enterprises which have cared to approach the Corporat ions . It is only a rough ind ica t ion because a l l the loans applied for do not repre­sent real requirements. Often the applicants migh t ask fo r inflated amounts in the hope that at least a part of the amount asked for w i l l be sanctioned.

It can be seen f rom Tab le I that d u r i n g the per iod of eight years ap­plications for loans totalled Rs 68.28 crores and more than thr ice the total funds available. The amount of loans sanctioned was Rs 26.72 crores or barely 40 per cent of the amount required. However, the amount sanctioned exceeded the total loan-able funds of the Corporations: avai l­able as on M a r c h 31st, 1960 by more than five crores of rupees. W h i l e some comfort may he drawn f r o m this fact, it w i l l be seen that the actual amount disbursed out of the sanctioned loans was only Rs. 17.37 crores or 66 per cent of the amount sanctioned and 80.8 per cent of the total funds of the Cor­porat ions. W h y should over 30 per cent of the sanctioned loans have remained undisbursed? One reason, lies in the t ime-lag between the sanctioning of a loan and its disbursement. Since most of the loans an- to be paid for acquisit ion of block assets the time-lag is un­avoidable because arrangement for acqu i r ing such assets always involves delay. But this does not entirely exp la in the difference between the sanctioned and paid amounts. Per­haps a more impor tant reason is that some of the concerns to which

T H E E C O N O M I C W E E K L Y November 5, 1960

the loans have been sanctioned do not avai l of them whol ly or par t ly . It w o u l d then be pertinent to ask why loans which have been already sanctioned are not taken by the ap­plicant units, It may be either that they have made alternative arrange­ments for the requisite f inance or that the conditions on which the loans are sanctioned are not accept­able to them. In fact, in some cases the concerns might be induced to make alternative arrangement for finance because the terms stipulated by the Corporat ions were found to be unacceptable. If this is really so, one may be justified in conclud­ing that the policy adopted by the Corporat ions in sanctioning loans was overcautious and rigid.

It is true that the State f i n a n c i a l Corporat ions have to avoid excessive risks which might endanger their existence as wel l as excessive t i m i ­d i t y which would make them pract i ­cally ineffective. This is, no doubt, a difficult task, but since their func­t ion is to assist small and medium industries, it is felt that they should err more on the r isky side. Libe­ral isat ion of the policy fol lowed in assessing applicat ions for loans and in de termining (he terms on which the loans are granted is imperative

if the Corporat ions are to play an effective rote.

U T I L I S A T I O N O F F U N D S

There is, however, another aspect wh ich requires consideration. Since the Corporations are continually re­ceiving repayment instalments f r o m borrowers at the same time as they disburse fresh loans, they have on I heir hands at any par t icular moment some part of their o r ig ina l funds as wel l as the amounts repaid . If at any time loan payments do not keep pace w i t h repayments, the Cor­porations w i l l have surplus funds on their hands which would have to be invested in COY eminent Securities or deposited wi th banks. Therefore, the total amount outstanding at any time w i l l be an index of the f ru i t -fulness of the ut i l isat ion of the Cor-porations resourees.

To find out the extent to which funds have been f r u i t f u l l y util ised, an average of the amount of loans outstanding over the past three years 1958, 1959, I960 - has been worked out in Table 11 and com­pared wi th the average of loanable resources of the Corporations over the same per iod. It is seen that the average total amount of loans out­standing of all the Corporat ions was

approximately Rs 11.14 crores as against the average amount of loan­able funds of Rs 19.11 crores. Thus the Corporat ions have been able to util ise only 57.3 per cent of their re­sources for their intended purpose. That over 40 per cent of the loan­able resources remained idle in­dicates either lack of 'deserving applicants or again a stiff approach towards the app ly ing units on the part of the Corporations.

INDIVIDUAL CORPORATION

As the Corporat ions were esta­blished on different dates, their per­formance is not s t r ic t ly comparable. Keeping this fact in m i n d the role played by each Corporat ion may now be reviewed.

To the total amount of finance pro­vided by the Corporat ions amount ing to Rs 17.37 crores the cont r ibu t ion of the Madras Industr ial and Invest­ment Corpora t ion is the highest. This is not surpr is ing in view of the fact that it was the first Corporat ion to be established. The loans advanced by it upto March , 31st 1959 come to Rs 4.09 crores f o r m i n g 23.5 pel-cent of the aggregate finance extend­ed by the Corporations. The second in importance is the Bombay State F inancia l Corpora t ion . On March ,

T H E E C O N O M I C W E E K L Y November 5, 1960

31 1960, the loans disbursed by it d u r i n g nearly eight years of its ex­istence total led Rs, 2.14 crores, or 14 per cent of the total loans ad-vanccd by all the Corporations. The t h i r d , fou r th and f i f th places are oc­cupied by the West B e n g a l the Punjab and the Kerala Corporat ions respectively, con t r ibu t ing 10.1, 9.8 and 8.7 per cent of the total help given. It is not necessary to com­ment on the performance of the re­ma in ing Corporat ions whose ind i ­v idua l contr ibut ions are small.

Another impor tan t aspect of the w o r k i n g of the Corporations is the p r o p o r t i o n of their resources util ised in loans advanced to indus t r ia l con­cerns at any one point of t ime. As explained above this is the c r i t e r ion wh ich measures the extent to which their resources remain idle in the fo rm of Government Securities or short-term deposits wi th banks. For j u d g i n g this aspect of the Corpora-t ions ' w o r k i n g . I have taken, as stated above, the average of loans outstanding in the last three years, 1958, 1959, 1900. For the Madras Corporat ion, however, the years are 1957, 1958, 1959, as the An­nual Report for I 9 6 0 is not avail­able. The percentage this amount forms of the average loanable re­sources available in the same period i s then worked out (Table I I ) . This is l ike ly to give more accurate results than the figures re la t ing to any one year since both the outstanding loans as we l l as resources have tended to vary d u r i n g the pe r iod .

Here again it is observed that the Madras Corpora t ion has uti l ised the highest p ropor t ion of its resources, 78.7 per cent in this way. Kerala w i t h 72.04 per cent ut i l isat ion comes second, fol lowed by West Bengal (67 per cent) and Assam (66.4 per cen t ) . W h i l e A n d h r a Pradesh has util ised the lowest p ropo r t i on viz. 39.5 per cent of its resources fo r their proper purpose, Bombay, Ut ta r Pradesh and Madhya Pradesh Cor­porations also give a poor account of themselves in this respect.

On general consideration? the pro­por t ion of assistance rendered by each Corpora t ion as well as the per­centage of its resources uti l ised in loans may be expected to reflect the degree of indust r ia l i sa t ion of the respective State. Table I shows that whi le in respect of the share of total finance provided this seems to be broadly true, the pat tern of ' u t i l i ­sation of loanable funds does not

conform to this generalisation. Bom­bay being the most highly industr ia­lised State, its Corpora t ion may be expected to uti l ise its resources most effectively. Actual ly it trails far be­h ind other relatively less developed Slates w i t h only 49.1 per cent of its loanable funds invested in advances to industry over the last three years. On the other hand, Madras and Kera la Corporations, al though situat­ed in much less industrialised states, have been able to use their funds far more f ru i t fu l l y than the Bombay State Financial Corpora t ion . The low ut i l isat ion in case of Andhra Pradesh, Madhya Pradesh and Raja-shathan, however, is not unexpected in view of their industr ia l back­wardness.

F I N A N C I A L R E S U L T S

A br ie f reference may now be made to the f inancial results of the w o r k i n g of the Corporations. Since a detailed analysis is not intended, only one feature of their w o r k i n g lias been taken as an index of their performance. This is the total amount of subvention received by them f rom the State Governments for paying the guaranteed d iv idend . The amount of subvention w i l l indicate the deficit incurred by the Corpora-tions in the amount available for dis­t r ibu t ion of d iv idend f rom their pro­fits which in t u r n w i l l show how far they have been able to pay their way.

F rom Table III it is evident that apart f rom the Madras Indust r ia l

November 5, 1960 T H E E C O N O M I C W E E K L Y

T H E E C O N O M I C W E E K L Y November 5, 1960

and Investment Corpora t ion , Madhya Pradesh has gone farthest on its way to becoming independent of the support of the State Govern­ment. Its l i a b i l i t y to the State Gov­ernment in the fo rm of subvention received amounts to Rs 7.30 lakhs only as at M a r c h 3 1 , 1960. At the same t ime it has been able to meet 64.2 per cent of its d iv idend l i a b i l i t y fo r the year ended M a r c h 3 1 , 1960 f r o m its own p ro f i t . A l though the percentage of d iv idend l i a b i l i t y met f r o m the Kera la Corporat ion 's own prof i t was higher at 76.50 per cent, i ts accumulated l i a b i l i t y to the State Government fo r subventions received is heavier being Rs 7,62 lakhs. Nevertheless its performance in the matter of progressive reduction of dependance on the State Government deserves notice.

Bombay, A n d h r a Pradesh and West Bengal Corporat ions stand at the other end of the scale as regards the accumulated subvent ion- l iabi l i ty . Whereas the aggregate amounts of subvention received by the Andhra Pradesh and West Bengal Corpora­t i on are very large, being Rs 14.14 lakhs and Rs 11.49 lakhs respective­l y , they have been able to meet respectively 60 and 70 per cent of their d iv idend l i a b i l i t y f r o m thei r o w n profits in 1960. The case of the

Bombay State F inanc ia l Corpora t ion is unique. W h i l e its accumulated subvent ion- l iabi l i ty at Rs 27.59 lakhs is the highest among al l the Corporations, i t has met on ly 39 per cent of its d iv idend l i a b i l i t y in 1960 f r o m its own profi ts . In view of the fact that almost a l l the Corporat ions have met at least 60 per cent of their d iv idend l i a b i l i t y in 1960 f r o m their o w n profi ts , the results of the Bombay Corpora t ion are indeed a sad commentary on its w o r k i n g .

O V E R A L L P I C T U R E

The overal l p ic ture that emerges is not very b r igh t . The Corporat ions have u t i l i sed a substantial p ropo r t i on of their resources for extending as­sistance to med ium and small i n ­dustries over the entire per iod of their existence. But , on an average, large funds remain idle every year. The gulf between the amount sanctioned and the amount disbursed is wide. A n d f inal ly , perhaps as a consequ­ence of low ut i l i sa t ion of resources, the Corporat ions are faced w i t h defi­cits in their earnings w h i c h compel them to re ly heavily on the State Governments for meeting their d i v i d ­end l i a b i l i t y . The amount of such l i a b i l i t y is large in almost every case and its l i q u i d a t i o n w i l l remain a p rob lem for a l ong l ime to come.

Centra l Revenue Collections

T H E revenue realised f r o m i m ­por tant dut iable items in the

first five months of the fiscal year 1960-61 amounted to Rs 290.90 crores. Of this, Rs 59.47 crores were collected d u r i n g August , 1960. The corresponding f igures fo r the first five months of the fiscal year 1959-60 were Rs 250,65 crores and Rs 50.81 crores for August, 1959. Details under various heads are as follows (Rs l a k h s ) :