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What is Industrial Sickness?

An industrial unit tends to show signs of financial distress starting with: short term liquidity problems; revenue losses; operating losses; and moving in the direction of over use of external credit. until it reaches a stage where it is overburdened with debt and not being able to generate sufficient funds to meet its obligation.

Which type of units are sick?


1. To a Layman:A sick unit is one which is not healthy. 2. To an Investor:It is one which is not giving dividends. 3. To a Banker:It is a unit which has incurred cash losses in the previous year and is about to repeat the same performance in current and following years. 4. To an Industrialist:It is a unit which is making losses and about to close.

Industrial Sickness Definition:


1. According to RBI:A sick unit is that which has incurred a cash loss for one year and is likely to continue incurring losses for the current year as well as in the following year and the unit has an imbalance in its financial structure. 2. According to SICA, 1985: A unit was defined as industrial company (being a company registered for not less than seven years )which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth and has also suffered cash losses in such financial year and the financial year immediately preceding such financial year 3. Definition according to companies Act,2002:Sick industrial company means an industrial company which has Accumulated losses in any financial year which are equal to 50 percent or more of its average net worth during four year immediately preceding such financial year Failed to repay its debts within any three consecutive quarter on demand made in writing for its repayment by a creditor of such company.

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Causes of industrial sickness:


The causes which are responsible for industrial sickness in Inmdia are broadly classified into: 1) Internal and 2) External causes. The following are some of the external and internal causes of industrial sickness:

Internal Causes:
1) Mismanagement:- in various functional areas of a company like finance, production, marketing and personnel resulting from wrong managerial decisions; 2) Wrong location of a unit:- for eg: high technology based projects being based in areas without skilled labor or supporting infrastructure.; 3) Overestimation of demand and wrong dividend policy; 4) Faulty planning of the production in the absence of market analysis 5) Defective Selection of plant and machineries 6) Adoption of Obsolete Technology particularly in the small sector 7) Poor Implementation of Projects which may be due to improper planning or managerial inefficiency; 8) Poor Inventory Management in respect of finished goods as well as inputs; 9) Unwarranted expansion and diversion of resources such as personal extravagances,excessive overheads, acquisition of unproductive fixed assets,etc.; 10) Failure to Modernise the productive apparatus, change the product mix and other elements of marketing mix to suit the changing environment; 11) Poor Labour Management Relationship and associated low workers' morale and low productivity, strikes, lockouts, etc arising from strained industrial relation over the issues like wages, bonus, industrial discipline etc. 12) Paucity of funds and faulty financial management

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13) Acute Financial Problems due to weak equity base and lack of adequate support from banks 14) Time and cost overruns prove to be disastrous. Delay in supply of equipment, slippage in the schedule of civil works etc. Such delays cause cost escalations leading to liquidity issues and capital shortages. 15) Incompetent Entrepreneurs having lack of knowledge about costing, marketing, accounts, etc. 16) Unwarranted expansion and diversion of resources

External Causes:
1) Energy crisis:- arising out of power cuts imposed by state governments or shortage of coal and oil have been a serious problem for many industrial units. 2) Irregular Supply Of Inputs:- Inability of the units to achieve optimum capacity due to shortage of raw materials and other inputs due to its erratic supply, poor agricultural output due to natural reasons etc. 3) Infrastructural problems like transport bottlenecks; 4) Shortage of working capital / liquidity constraints; 5) Recession:- in market resulting from steep fall in quantam of demand for industrial products aggravated by credit restraints that results in unsold stocks and losses to industrial units. 6) Artificial economic constraints:- eg. Government control of product mix and prices, competition faced by the unit and excess capacity in the industry. 7) Official or Government Policy:- Frequent change in government policy in connection with industrial licensing, taxation, power tarrif, imports, exports etc. 8) Changes in Technology; 9) Change in consumer behaviour;

Himani Jain

Email:himani2210@gmail.com

Consequences of IS:
Industrial sickness has been resulting in serious consequences in an underdeveloped labour surplus economy like India. These consequences of IS include: 1) Adverse impact on society:- Aggravating employment problem, Lack of labour intensiveness, high unsatisfaction rate due to closure of industrial units. 2) Fear of industrial unrest :- Widespread labour unrest, high unemployment rate, low productivity,unfavour of trade union due to closur and threatening industrial environment of the country. 3) Wastage of resources:- Wastage of huge resources invested in these sick units, lack of infrastructure facilities, block of capital equipment. 4) Adverse impact on related units: Adverse impact on related units through backward and forward linkages. For e.g.Channel breakdown between industries; Impact on suppliers; Impact on distributors; 5) Adverse effect on investor & entrepreneur:Low satisfaction of investor; Negative effect on the same line new entrepreneur; Effect on the growth rate of industry, due to widespread closure of units. 6) Losses to banks & financial institution:Causing hugelosses to banks and other term leading institutions and locking up huge funds into these sick units. For e.g. low recovery rate of banks & institution; loss image in the market; lack of financial support for new industries. 7) Loss of revenue to Government:Resulting huge loss of revenue to both Centre, State and Local govt.

Himani Jain

Email:himani2210@gmail.com

Remedial Measures to deal with the problem of sickness:


Industrial sickness is a serious problem faced by the country at present. This affected the health of industries working under both public and private sector. Thus in meantime various incentives, conclusions. doles etc. has been offered to these sick units for their revival. These measures for revival and rehabilitation are discussed below: 1. Measures taken by Banks:- In order to revive and rehabilitate the sick industrial units, the commercial banks granted various concessions to these units which include: 1. Granting additional working capital; 2. Recovery of interest at reduced rate; 3. Freezing a part of understanding in the accounts of these units; 4. Sick industrial undertaking cell; 5. State-level inter institutional committees; 6. a standing co-ordinating committee(constituted by RBI) from coordinating various issues related to commercial banks and term leading institutions 7. defining the special cell within rehabilitation finance division of IDBI; 2. Measures taken by Government:- In order to deal with problem of IS, the government laid down various guidelines Oct 1981 for guidance of administrative machineries. The main features of these guidelines are: Features: a) The administers ministers in government has been given specific responsibility for taking remedial action and preventing IS. b) In order to take corrective actionfor preventing incipient sickness, the financial institution will strengthen the monitoring system and may take over the mgt of unit for its revival. c) whenever the bank and other financial institutionfails to prevent sickness of a sick unit thereafter reporting the matter to govt. they recovery their outstanding dues with normal banking procedure; d) In order to nationalise the undertaking, the mgt of the unit may be taken over under the provisions of Industries(Development and Regulation) Act, 1951 for 6 month period; 3. Concessions provided by the Government:- The govt has also made provision for certain concessions for assisting the revival process of sick units. These include: a) Tax benefit to healthy unit who taking over sick units for its revival(amendments of income tax act in 1977 by adding sec 72A). b) Introduction of margin money scheme for revival of sick units in Jan 1982;

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c) Introduction of liberalized margin money scheme in June 1987 for high liberalizations in terms of financial rather than intervention. The amt of assistance was raised from 20,000 to 50,000. 4. Industrial Investment Bank of India(IIBI): In order to revive and rehabilitate sick units government set up the IRCI (industrial reconstruction corporation of india) with its authorized capital of 2.5 crore. Features: a) For provide financial assistance, managerial and technical assistance; b) Secure assistance from other financial institutions and government agencies for revival of sick units; c) Provide merchant banking services for amalgamation, merger etc; d) Conversion of IRCI into a statutory corporation named IRBI in March 20 ,1985(authorized capital of Rs 200 crores & paid up capital of Rs 50 crores) e) Conversion of IRBI into IIBI in march 27, 1997 5. Steps for Early Detection of Sickness: 1) In order to detect sickness of those cos for those who are not covered under SICA,1985, corrective steps has been taken by RBI : Features: a) Giving advice to the banks in respect of any industrial unit; b) Monitoring certain industries through its standing committees; 2) Exice Loan: Introduction of excise loan policy by govt in October 1989 for the grant of excise loan to weak and sick industrial unit. As per the scheme the selected units will become eligible for excise loan upto 50% of the excise duty paid by unit for last 5 years.

Himani Jain

Email:himani2210@gmail.com