It is no use merely categorising SFCs into profit and loss-making ones, as IDBI has done. Concrete plans need to be put in place to rejuvenate these rickety institutions. Consider the constraints under which they have functioned. They are under the administrative control of state governments, with all attendant misuse that such control entails; they lack resources, with high-cost borrowings being the only option; and they are now subject to competition not only from commercial banks, but also from SIDBI itself. These constraints have resulted in the progressive sickness of the state-level FIs, and NPAs have burgeoned. Yet another reason has been the schemes which SFCs are called upon to finance -- unemployed graduate schemes, women entrepreneur schemes etc, -- whose objectives are social rather than commercial.

The problem of the state-level financial institutions will not go away by pretending they do not exist. Several solutions have been mooted and the reports are as usual gatheringdust. If the SFC problem is not to snowball into a major crisis, immediate action is needed. It has to be recognised that small-scale entrepreneurs are the drivers of job-creation in this country, and their need for funding is currently not met by the commercial banks. Since the availability of venture capital too is negligible compared to the need, state-level financial institutions have a clear role to play. The challenge is to come up with innovative means by which the SFCs can be reformed so as to enable them to come out of the vicious cycle in which they find themselves. They must not be allowed to become the Achilles' heel of the Indian financial system.