Industrial Sickness:

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

current and following years.

performance in

Cont..
4. To an Industrialist:It is a unit which is making losses and about to close.

Introduction:
1. As industrial sickness is an umbrella term applied to various things associated with industry that make people ill and cause them to miss work. Industrial sickness has been growing from the last decade. The health of many traditional and modern industries are now being effected adversely by industrial sickness. It causes wastage of national resource and social un rest. Persisting problems are been faced by the industrial sector of the country.

2. 3. 4. 5.

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

Actual Sickness:
1.
2.

Erosion of net worth by 50% or more;

Units being closed for a total period of six months and more during the last year;

3.

Default in the payment of loan installments;

Causes of Industrial Sickness:

Causes

Internal

External

Internal Causes:
Faulty location of industrial unit; Defective selection of plant and machineries; Improper Choice Of Technology; Official or Government Policy; Faulty financial management;

Incompetent entrepreneurs;
Lack of experience;

Internal Causes Cont..

Incorrect assessment of the market potential; Underestimation of the cost of the project ; Delay in the implementation of the project Increased cost due to delay in implementation of project; Under utilisation of Resources;

Bad Industrial Relations;

Heavy Expenditure in Advertisements;

External Causes:
Energy crisis; Irregular Supply Of Inputs; Recession; Official or Government Policy; Lack of Infrastructure Facilities;

Tough Competition;
Changes in Technology; Change in consumer behaviour;

Consequences of IS:
1. Adverse impact on society:a) b) c) Lack of employment opportunity; Lack labour intensive; High unsatisfaction rate;

2. Fear of industrial unrest :a) b) c) High unemployment rate; Low productivity; Unfavour of trade union;

3. Wastage of resources:a) b) Lack of infrastructure facilities; Block of capital equipment;

Consequences of IS Cont..
4. Adverse impact on related units:
a) b) c) Channel breakdown between industries; Impact on suppliers; Impact on distributors;

5. Adverse effect on investor & entrepreneur:a) b) c) Low satisfaction of investor; Negative effect on the same line new entrepreneur; Effect on the growth rate of industry;

6. Losses to banks & financial institution:a) b) c) low recovery rate of banks & institution; loss image in the market; lack of financial support for new industries;

Remedial Measures:
1. Measures taken by banks:
a) b) c) d) e) f) Granting additional working capital; Recovery of interest at reduced rate; Freezing a part of understanding in accounts; Sick industrial undertaking cell; State-level inter institutional committes; defining the special cell in the RBI;

Remedial Measures Cont..

2. Measures taken by Government:
Guidelines were laid down in Oct 1981 for guidance of administrative machineries; Features: a) Responsibility given to administers ministers in government; b) Strengthen the monitoring system of financial institution; c) Recovery of outstanding dues with normal banking procedure; d) To nationalise the undertaking take over the management of the unit for 6 month period;

Remedial Measures Cont..

3. Concessions provided by the government:
a) b) c) Tax benefit to healthy unit who taking over sick units for its revival; Introduction of margin money scheme; High liberalizations in terms of financial rather than intervention.

Remedial Measures Cont..

4. Industrial Investment Bank of India(IIBI):
a) Government set up the IRCI (industrial reconstruction corporation of india) Features: Authorised capital of Rs. 2.5 crore; Provide financial assistance, managerial and technical assistance; Secure assistance from other financial institutions and government Agencies for revival of sick units; Provide merchant banking services for amalgamation, merger etc; b) Conversion of IRCI into IRBI in March 20 ,1985
c) Conversion of IRBI into IIBI in march 27, 1997

Remedial Measures Cont..

5. Steps for early detection of sickness:
a) Corrective steps taken by RBI for those who are not covered under SICA,1985;

Features: Giving advice to the banks; Monitoring certain industries through its standing committees; b) Introduce excise loan policy in October 1989