CHAPTER - 1 INTRODUCTION

1.1PROFILE OF DEVELOPMENT BANKING

The economic development of any country depends on the extent to which its financial system efficiently and effectively mobilizes and allocates resources. There are a number of banks and financial institutions that perform this function; one of them is the development bank Development banks are unique financial institutions that perform the special task of fostering the development of a nation, generally not undertaken by other banks. Development Banks are financial agencies that provide medium and long-term financial assistance and act as catalytic agents in promoting balanced development of the country. They are engaged in promotion and development of industry, agriculture, and other key sectors. They also provide development services that can aid in the accelerated growth of an economy. The objectives of development banks are as follows: 1) To serve as an agent of development in various sectors, such as industry, agriculture,and institutional trade. 2) To accelerate the growth of the economy. 3) To allocate resources to high priority areas. 4) To foster rapid industrialization, particularly in private sector, so as to provide employment opportunities as well as higher production. 5) To develop entrepreneurial skills. 6) To promote the development of rural areas. 7) To finance housing, small scale industries, infrastructure, and social utilities.

Evolution of Development Banks

The concept of development banking originated during the post Second World War period. Many countries of Europe were in the stage of industrial development and special financial institutions known as development banks were set to foster industrial growth. In the US, development financial institutions came into existence for special purposes such as economic rehabilitation and filling gaps in the traditional financing patterns. Not only developed countries, but also several underdeveloped countries in Asia, Africa, and Latin America established special financial institutions to hasten the pace of industrialization and growth. The International Bank for Reconstruction and Development (IBRD) known as the World Bank is the example of development bank at the international level. The major objective of the World Bank is to promote world development and perform the task of transfer of enormous financial and technical resources from the developed to developing countries. The need for development financial

institutions was felt strongly immediately after India attained independence. The country was in need of a strong capital goods sector to accelerate the pace of industrialization. The existing industries were in need of long-term funds for their reconstruction, modernisation, expansion, and diversification programs while the new industries required enormous investments for setting up gigantic projects in the capital goods sector. However, there were gaps in the banking system and capital markets which needed to be filled to meet this enormous requirements of funds. To fill these gaps, a new institutional machinery was devised the setting up of special financial institutions, which would provide the necessary financial resources and know-how so as to foster the industrial growth of the country. The first step towards building up a structure of development financial institutions was taken in 1948 by establishing the Industrial Financial Corporation of India (IFCI) Ltd. This institution was set up by an Act of Parliament with view to providing medium and long-term credit to units in the corporate sector and industrial concerns. In view of the immensity of the task and size of the country, it was not possible for a single institution to cater to the financial needs of small industries spread in different states. Hence, the necessity for setting up regional banks to cater to the needs of small and medium enterprises was recognized. Accordingly, the State Financial Corporations Act was passed in 1951 for setting up State Financial Corporations (SFCs) in different states. By 1955-56, 12 SFCs were set up and by 1967-68, all the 18 SFCs now in operation came into existence. SFCs extend financial assistance to small enterprises. Beginning with establishment of the industrial finance corporation of India, with effect from July 1, 1948, India has traversed a great deal in the sphere of development banking. In fact, it would not be wrong to say that in the field of development banking. In fact, it would not be wrong to say that in the field of development banking, India is fairly advanced country, with a capacity for providing technical assistance to the less developed countries in establishing and running development banks.

1.2 STATE FINANCIAL CORPORATION

1.2.1 Profile of State Financial Corporation
For a vast country like India with a federal set up, it is quite obvious that development banks at the state level are necessary. This point was set forth in the report of the Central Banking Enquiry Committee more than six decades back. The idea of having special industrial financial institutions in the various states was revived at the time of establishment of the IFCI. State Financial Corporations (SFCs) set up in various states as regional institutes represent an attempt to diversify the structure of development banking in India so as to be able to cope up with the requirements of wider sections of industrial Enterprise. At present, there are 18 SFCs in the country. The states of Manipur, Meghalaya, Mizoram, Nagaland, Goa, Sikkim, Tripura, Uttarakhand, Chhattisgarh, Jharkhand, and the Union Territories except Delhi have yet to have their own SFC. The area of operations of a SFC is normally confined to one State/Union Territory, but, they can be extended to other States/Union Territories which do not have SFC of their own. The Assam SFC operates also in Manipur and Tripura. Chandigarh is served by SFC of Delhi, while Goa, Daman and Dieu by Maharashtra, Dadra and Nagar Haveli by Gujarat and Pondichery by Tamil Nadu SFC.

1.2.2State Financial Corporations Act, 1951

At the time of the enactment of the Industrial Finance Bill in 1948, it was recognized that Industrial Financial Corporation would not be able to cater to the capital needs of small and medium industrial concerns scattered all over the country. The suggestions for the setting up of Provincial Finance Corporations were received from a large number of members in the Central Constituent Assembly. When the Central Government discussed the proposal with the State Governments, theygenerally supported the idea but wanted a separate enactment with a view to promoteuniformity and control in management. They considered it necessary in order to make it possible to incorporate in the Constitution, necessary provisions in regard to majoritycontrol by Government, guaranteed by the State Government in regard to the repaymentof principal, and payment of a minimum rate of dividend on the shares, restriction ondistribution of profits and special powers for the enforcement of its claims and recoveryof dues. Such a statue was also needed to coordinate the activities of the CentralGovernment, State Governments, RBI and IFCI, with the activities of theseCorporations. While the proposal for the establishment of such Corporations was being examined bythe RBI, IFCI, and the Central Government, Tamil Nadu Government took the lead andestablished Tamil Nadu Industrial Investment Corporation Ltd. under the CompaniesAct. In September 1949, the Central Government issued a circular letter to all the StateGovernments and after incorporating their views in regard to the shape and structure of the proposed corporations, the Government introduced the State Financial CorporationsBill in the Parliament. The Bill was presented by Sh. C.D. Deshmukh, Minister of Finance on December 13, 1950 which was finally passed on September 28, 1951 and theState Financial Corporations Act came into force from August 1, 1952. This Actempowered the State Governments to establish financial corporations in their respectiveStates. Provision was also made to bring within the scope of this Act, any institutionalready in existence, and concerned with the financing of industry. This was done at theinstance of Tamil Nadu Government which wanted to bring within the scope of this Act,the Tamil Nadu Industrial Investment Corporation Ltd. The first State Financial Corporation set up under the Act was the Punjab FinancialCorporation which was established in Feb. 1953. Gradually, similar Financial Corporations were established in different States. In Karnataka, the State FinancialCorporation was set up on March 30, 1959. At present, there are 18 State FinancialCorporations functioning in different States and Union Territories. 1.2.3 Types of Financial Assistance A SFC is authorized by Statue to provide different forms of financial assistance. 1) Granting loans or advances for periods not exceeding 20 years. 2) Subscribing to debentures repayable within twenty years. 3) Guaranteeing loans raised by industrial concerns either in the public market or fromscheduled or co-operative banks and repayable within 20 years.

4) Guaranteeing deferred payments due from any industrial concern for purchase of capital goods within India;. 5) Underwriting the issue of stocks, shares, bonds or debentures; 6) Subscribing to stocks, shares, bonds or debentures of industrial concerns from out of the special capital.SFCs Amendment Act, 1972 has empowered the SFCs to participate in the equity capitalof weaker small and medium industrial undertakings. Since, June 1973, SFCs have also been authorized to meet the foreign exchange requirements of small and medium scaleunits. For this purpose, refinance facility is provided by the IDBI. SFCs also act as the agent of the Central and State Governments, IDBI, IFCI, or anyother financial institutions in matters concerned with the grant of loans or advances or subscription to debentures. Most of the IDBI schemes for assistance to small andmedium sectors are operated through SFCs.

1.2.4 Financial Resources of State Financial Corporations

Initially, the Authorized Share Capital of a State Financial Corporation was required to be fixed by the concerned State Government within the limit of Rs.2crore. But, subsequent Amendments authorized the SFCs to raise their Authorized Share Capital. The share capital of the State Financial Corporation is subscribed by the respective State Governments, the Reserve Bank of India, Scheduled Commercial Banks, Co-operative Banks, Insurance Companies, Financial Institutions and private parties. In this connection, it may be noted that the maximum allotment to private parties cannot exceed25% of the share capital of each corporation. Besides, share capital, the financial resources of State Financial Corporations comprises: 1) Loans from the Reserve Bank of India 2) Loans from the State Government 3) Bonds and Debentures issued 4) Deposits from the Public 5) Refinance from the IDBI 6) Repayment of Loans Granted 7) Income from Investments

1.2.5 List of State Financial Corporations

At present, there are 18 SFCs in the country, 17 of which were set up under the SFCs Act1951. Tamil Nadu Industrial Investment Corporation Ltd. set up in 1949 under the companies Act as Madras Industrial Investment Corporation also Functions as a Full-Fledged SFC. Various SFCs in the country are as follows:

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

1.3 KARNATAKA STATE FINANCIAL CORPORATION 1.3.1 Profile of Karnataka State Financial Corporation
Karnataka State Financial Corporation is a State level financial institution established by the State Government in the year 1959 under the State Financial Corporations Act 1951 to meet mainly the long term financial needs of Micro, Small and Medium Enterprises (MSMEs) in the State of Karnataka. Today, while the State economy is making rapid strides in the global market, KSFC is moving in tandem. As a pioneering and responsive financial institution, KSFC is fine-tuned to fulfil the plans and aspirations of entrepreneurs by extending all possible assistance. In the 52 years of its existence, KSFC has contributed most significantly for the growth of SMEs,

backward area development and promotion of first generation entrepreneurs. Its achievements in these areas are unparalleled. Since inception, KSFC has assisted more than 1.60lakh units with cumulative sanction of more than Rs. 10,464crore out of which about 50% is towards SMEs. Amendments to SFCs Act provide wide-ranging scope in financial assistance and operational flexibility. Keeping this in view, KSFC has re-engineered itself to ensure utmost customer satisfaction with new energy, thrust and speed. In line with this, the Corporation has put in place comprehensive, client-friendly, need-based policies in the areas of credits and recoveries. Apart from setting standards of performance, these policies would also achieve the objective of transparent governance. KSFC an ISO 9001:2000 certified organization is proud to have played a major role in the industrial development of the State. It is also the proud privilege of KSFC to have assisted many industries that are internationally recognized like INFOSYS and BIOCON.

1.3.2 Historical Background

In 1950, the Government of India circulated a draft bill for eliciting the views of theState Government and of the RBI. The

SFCs bill was introduced in parliament in December 1950 and passed in 1951; it came into force on AUG 1, 1951.The KSFC, which prior to November 1, 1973 was known as the Mysore State Financial Corporation, was established on March 30, 1959, that is to say, the last but one day of the financial year 1959-60. Although State Financial Corporations Act came into effect as far back as August 1, 1952, the then Government of Mysore established the Corporation several years later. In the Reserve Bank Report on Currency and Finance for the year 1955-56, it was stated that the Mysore Government have also decided to set up a financial corporation. However, this event happened four years later. It has not been possible to find out the reasons for the delay in the establishment of the corporation. On111-1973, it was renamed as Karnataka State Financial Corporation. The Authorized Share Capital was fixed by the Mysore Government at Rs. 2.00crore out of which Rs.1.00crore was fully paid up. The stake of the Government of Mysore in the Corporation was Rs.40.465 lakhs and that of the RBI was Rs.15.00lakhs. The Authorized Share Capital of the Corporation now stands at Rs. 750Crore. Sri. G.Mathias, I.A.S., was the first Chairman of the Board and Sri. M. Vasudeva Rao, I.A.S., was the first Managing Director. In the first year of its operation, namely 1959-60, the Corporation sanctioned 11 loans for a total sum of Rs. 28.00 lakhs. A sum of Rs.13.01 lakhs (to be precise Rs.13,01,238) was disbursed during the year. Such was the humble beginning of the operations of the Corporation. The financial results too were also miniscule. In its first year, the Corporations earnings aggregated to Rs. 3.33 lakhs of which only Rs. 4,037 was income from loans and advances to industrial units. The expenses of the Corporation for the year amounted to Rs. 88,275. Thus, the Corporation

made a net profit of Rs. 2,44,775 in the first year of its operation. Such is the story of the Corporations modest beginning.

1.3.3 Mission and Vision Statement Mission Statement

KSFC is committed to nurture, develop and service the SME sector Through need based product and service.

Vision Statement
To be a premier financial institution in the country, by providing effective and efficient services to all sectors of people under one roof. Its vision is All for one & one for all.

1.3.4 Objectives of KSFC

The objectives of KSFC are as follows: 1) To provide financial assistance in the form of term loans to tiny and ancillary units, small and medium scale industries in Karnataka 2) To encourage dispersal of industries to the backward areas to achieve balanced growth of the industries. 3) To provide equipment leasing, hire purchase, working capital assistance and assistance for research and development related activities. 4) To identify entrepreneurs throughout the state. 5) To provide enterprise development programs to women engineering and technical professionals and agriculturists. 6) To conduct district level industrial seminars. 7) To identify new projects and help local people to set up industries. 8) To develop databank on industrial units. 9) To conduct special survey on industrial opportunities

1.3.5 Quality Objective

The managing director, other executives and staff of the organization are committed to ensuring that the system is effective in achieving quality and satisfying customers both now and in the future. With this end in view, KSFC will strive continually to improve upon their products, service, and quality management system. KSFC have set measurable quality objectives, which will be measured against and reported upon at regular intervals. The Quality Objectives set are as follows: To ensure satisfaction through team-work and professional management. To extend effective guidance through entrepreneurs for successful accomplishment of their business venture. To provide good quality of service on a continued basis to the satisfaction of the customer. To attain specified level of performance every year and ensure compliance with statutory and regulatory requirements. To encourage everyone in the organization to upgrade and enhance their skill and knowledge with appropriate training for improving quality of service to the entrepreneur.

1.3.6 Functions of KSFC

According to Section 25 of SFCs Act, 1951, the functions of KSFC are as follows:1)It grants loans or advances to, or subscribes to debentures of an industrial concern.2)It guarantees, on such terms and conditions as may be agreed upon, Loans raised by industrial concerns, which are repayable within a period not exceeding 20 years, and are floated in the public market. Loans raised by industrial concerns from scheduled banks or state cooperative banks or other financial institutions.

1) It guarantees, on such terms and conditions as may be agreed upon, differed payments due from any industrial concerns in connection with its purchase of capital goods within India. 2) It underwrites the issue of the stock, shares, bonds or debentures by industrial concerns.

3) It transfers, for consideration, any instruments relating to loans and advances granted by it to industrial concerns. 4) It acts as an agent of the Central Government, or the State Government, or the IDBI, or the SIDBI, or the IFCI or any other financial institutions notified by the Central Government in respect of any matter connected with, or arising out of, the grant of loans or advances to an industrial concern, or subscription to debentures of an industrial concern or relating to the business of the IDBI, SIDBI, IFCI or any other financial institutions. 5) It subscribes to, purchases, the stock, shares, bonds or debentures of an industrial concern. 6) It retains as part of its assets, any stock, shares, bonds or debentures, which it may acquire by subscription or in fulfilment of its underwriting liabilities and it disposes of the stock shares, bonds, or debentures so acquired. 7) It accepts or discounts promissory notes and bills of exchange drawn or endorsed by industrial concerns or any person selling capital goods. 8) It undertakes research and surveys dealing with marketing or investment activities and undertakes techno-economic studies or other activities in connection with the development of any industry. 9) It provides technical and administrative assistance to an industrial concern. 10) It acts as the trustee for the holders of debenture or other securities. 11) It provides leasing, sub-leasing, hire-purchase and factoring services. 12) It provides export related credit and services. 13) It undertakes money market related activities. 14) It undertakes asset management activity. 15) It promotes, forms, conducts, and assists the companies, subsidiaries, co-operative societies, trusts, or such other associations of persons as it may deem it fit, in the promotion, formation, or conduct of companies. 16) It opens or confirms or endorses letter of credit and negotiates or collects bills and other documents drawn hereunder. It provides consultancy and merchant banking services