A Study on Performance of State Financial Corporation

State Financial Corporation Bill having been passed by both the Houses of Parliament received the assent of the President on 31st October, 1951. It came on the Statute Book as THE STATE FINANCIAL CORPORATIONS ACT, 1951 (63 OF 1951).Financial Corporation" means a Financial Corporation established under Section 3 and includes a Joint Financial Corporation established under Section 3A. The State Financial Corporations (SFCs) are state level financial institutions playing an important role in the development of small and medium enterprises, in their respective states in tandem with the national priorities. There are 18 SFC's in the country of which 17 were set up under the State Financial Corporations act 1951 and Tamilnadu Corporation Ltd. had been set up under the companies Act, in 1949 i.e. before the enactment of the SFC's Act. They aim at wider dispersion of small and medium units within each state. The role envies for them is not only of sending financial of development banks. They meet term credit needs of all such above told units. The type of assistance provided by them is generally similar to those of IFCI, IDBI, ICICI etc. The main objectives of SFC’s are to catalyze investment, generate employment and to broaden the ownership base of industries. The financial assistance includes term loan, direct subscription to equity seed, special capital. A State Financial Corporation operates a number of schemes of Refinance and Equity Type Assistance on behalf of IDBI, SIDBI. Beside they alsohave schemes for artisans and special target groupssuch as SC/ST, Woman, EX-Service men, physicallyhandicapped etc. in tandem with the changingenvironment. They are expanding the scope of theiractivities and coverage of their assistance. The SFCs under the dynamic leadership of SIDBI haveprovided unstinted support to the small-scale industriesin their creation and growth. The small-scale industrysector, in turn, has made significant contributionstowards building a strong and stable national economy.This sector constitutes 95 percent of total industrial units, producing a wide range of more than 7500products, accounts for almost 40 percent of output inmanufacturing sector and 35 percent of total exports.The SSI sector acts as a nursery for promotingentrepreneurial talent and as a catalyser in industrial growth through a wide network of more than 3 millionunits in the country. At present, the SSI sector is one of the largest employers in the country providing directemployment to an estimated over 17 millions persons.Had it not been for the help of SFC’s the SSI sectorwould not have been able to achieve its presentheights.

Haryana Financial Corporation is one of the mostimportant financial institution in the State of Haryana.HFC came into existence on 1st April 1967 as StateFinancial Corporation. HFC is set up by the StateGovernment of Haryana under the State Financial

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Corporation’s Act, 1951. The companies Act, 1956 is not applicable to the Corporation. Accordingly, the recommendations of the Securities and Exchange board of India (SEBI) on Corporate Governance as per clause 49 of the listing agreement is applicable to the limited extent, being a listed company. HFC is an autonomous body and it has been established to help the Industrialists to establish their industries in the State of Haryana. HFC meets the credits needs of small, medium scale industrial units by advancing term loans. The loans are advanced primarily for acquiring fixed assets such as land, building, plant &machinery etc.

Punjab Financial Corporation a premier leading institution of Punjab is a body incorporated under the State Financial Corporations Act 1951. The Corporation came into existence on 1st February, 1953. To perform the role of a Development Bank in the State of Punjab, Corporation was established with an objective of granting loans for the establishment of new industrial concerns, modernization, expansion/diversification of existing activities etc. The Corporation has played significant role in bringing about decentralized economic development, development of backward regions and also reduction in regional imbalances in the State. The Corporation also played a magnificent role for the promotion of small and tiny units in the state and creates self- employment opportunity for young entrepreneurs.

Delhi Financial Corporation has established in April, 1967 under the State Financial Corporation’s Act 1951. The DFC is engaged in promoting, financing and developing small-scale industries and service enterprises in Delhi & Chandigarh. Over the years the Corporation has played a critical role in promoting first generation entrepreneurs, besides fulfilling socio economic and legations like employment generation and alleviation of poverty. The share capital of the Corporation is subscribed by Govt. of Delhi, Chandigarh Administration and the Industrial Development Bank of India. The Corporation offers financial assistance to different sectors including medical, health and other allied activities. Loans are made available not only to set up new units but also for expansion, modernization diversification, for sniffing of industrial units from non-confirming to confirming areas and for change of commercial vehicles.

The purpose of literature review is not simply to describe or summaries the literature in the field. Theliterature review is an active process of construction ofthe research problem. It involves defining andproblematising the field within which one will situateour own research. A literature review involvesproviding a rationale for our selection of literature,drawing points of comparison or conflict between texts,and providing critical commentary on the selectedliterature. State Financial Corporations are an important area offinance and research in the past as well as in thepresent. Empirical studies have been conductedcovering the performance evaluation and role offinancial institutions and development banks. Important findings of some of the studies conducted in the pasthaving hearing on the discussion of the performanceappraisal and role of the financial corporations understudy have been reported below. Jain (1956) in his study looked at the total performanceof various institutional financing agencies, usingsecondary data only. The study reveals that theassistance to small scale industrial sector has beengrossly inadequate. Secondly, the agencies havedeveloped a preference of investing their funds in themedium and large scale units and the bigger onesamong the small scale units. Agarwal, B.R. (1966), in his study on “IndustrialFinance in Rajasthan” examined the role of RajasthanFinancial Corporation in extending financial assistanceto the industries in the state. He pointed out that therejection rate of loan application was very highbecause of procedural difficulties, and instance on 50per cent of security margins.

A research design is the arrangement of conditions forcollection and analysis of data in a manner that aims to combine relevance to the research purpose witheconomy in procedure. The study under considerationhas been conducted to examine the comparativeperformance of the HFC, PFC and DFC. This study isessentially exploratory in nature. It is exploratory in the sense that it explores the comparability of theperformances of the financial corporations. Exploratory research helps determine the best research design,data collection method and selection of subjects. Toenrich the research objectives the following researchdesign has been used.

The HFC, PFC and DFC have contributed to theindustrialization of the States in terms of Industrial

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production, diversification of the industrial structure, regional dispersal of industries, industrialization of the backward areas and employment generation etc. It is observed that HFC, PFC and DFC have a considerable importance in the States for industrial development. The finance provided by the HFC, PFC and DFC, if properly used, brings about prosperity in the States otherwise its diversion results in the disaster of the States. Therefore, it will be an interesting and important study to evaluate the HFC, PFC and DFC's impact on industrial development in Haryana, Punjab and Delhi with a view to ascertaining whether it has fulfilled its desired objectives. This is the objective of the present study and on the basis of this study we would attempt to draw relevant conclusions and makes some useful suggestions to revitalize these corporations and to revamp it as a useful instrument in the future for industrial development of Haryana, Punjab and Delhi.

SFCs have been playing an important role in developing small-scale and medium scale industries in India. At present there are 18 SFCs operating in India. Out of 18 SFCs Haryana, Punjab and Delhi Financial Corporations have been selected for study. These three SFCs are at present in different states of financial health. The present research has been carried out by studying the working results of these three SFCs over a period of 10 years (2000-01 to 2009-10). A time frame of ten years considered adequate to throw light on the comparative performance of these corporations. Further, due to liberalization and financial sector reforms introduced in the country during the last decade of the millennium, many dynamic changes have occurred. Therefore the study has also reflected the impact of these changes on the working of these Corporations.

Obviously, the main objective of the study is to comparative evaluation of the performances of HFC, PFC and DFC. This study intends to achieve the objectives stated below: 1. To study the schemes launched by these financial corporations. 2. To study the NPAS of HFC, PFC and DFC and suggest measures of reducing them. 3. To analyze the comparative performance of HFC, PFC and DFC in terms of loans sanctions and disbursements. 4. To find out conclusions and make usefulsuggestions.

Research methodology is a way to systematically solvethe research problem. It may be understood as ascience of studying how research is done scientifically. In it we study the various steps that are generallyadopted by a researcher in studying his researchproblem along with the logic behind them. It isnecessary for the researcher to know not only theresearch methods/techniques but also themethodology. Since the prime objective of the study is to comparative evaluation of performances of HFC,PFC and DFC and exploratory research design hasbeen adopted. Only secondary sources of data havebeen used for the study such as annual reports ofthese corporations, SFC's Act, 1951, Journals andNewspapers etc. To fulfill the objectives of the presentstudy following research methodology has been used.

As stated in the "Need of the Study" and "Scope of theStudy", three SFCs namely HFC, PFC and DFCoperating in Northern India have been selected for thepurpose of study.

The study under consideration is based on secondarydata. The main sources of the secondary data arepublished annual reports, journals, Newspapers, SFC’sAct, 1951 and other printed literature of theseinstitutions. Further data from annual reports of SIDBIand IDBI, has been also collected to enrich the study.

The collected data has been analyzed in the form ofsimple statistical tables. Uses of sample techniqueslike percentages, simple growth rate, compound annualgrowth rate and correlation-analysis have been used.More advance statistical technique such as t-test hasalso been used to enrich the results.

A percent is a ratio whose second term is 100. Percentmeans parts per hundred. The word percent comesfrom the Latin phrase per centum, which means perhundred. In mathematics, we use the symbol % forpercent. Percentages have been used to measure theshare of disbursements to sanctions, total sanctionsand sanctions to specific categories like small-scalesector, share of NPAs to gross advances, share of

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recovery to outstanding loans etc.

100

Where g = growth rate Pn = value of current year Po = value of previous year

Karl Pearson's Coefficient of Correlation has been used to study the correlation between sanctions, disbursements and sanctions/disbursements to specified categories like small-scale sector, economically weaker sections, etc., by applying the following formula

xyr.



Where r = Coefficient of Correlation

)();(YYYXXX

X = standard deviation of series x Y = standard deviation of series y N = Number of pairs of observation

t-test has also been applied to test the significance of coefficient of correlation. The ’t’ value for r is = N-2 gives the degree of freedom. The computed value of "t" compared with its table value at 5 percent level of significance for N-2 degrees of freedom. If computed value of "t" found greater than the table value, the correlation considered to be significant.

Every possible effort has been made by the researcherto complete the present research work in all aspects.But there are some limitations of the study underconsideration which are as follsows: 1) The data has been collected and analyzed forthe last ten years, though the SFCs have been inoperation for the last 50 years. 2) The data used in the study has been derivedfrom financial statements of respective financialcorporations; therefore the inherent limitations of the financial statement are present in the study. 3) The staff of the Corporations did not want todisclose all the required information due to legalprovisions. Therefore, in such cases the researcherwas unable to analysis the performance moreaccurately. 4) The data has been collected from three SFCsout of 18 SFCs operating in India.

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