INDUSTRIAL SICKNESS

Introduction
Industrial unit tends to show signs of financial distress with
Short-term liquidity problems
Revenue losses
Operating losses
Over use of external credit

Until it reaches a stage of being overburdened with debt and

inability to meet its obligations
Factory / Unit works below 20% of its capacity
Sickness universal phenomenon It is a symptom of
ailment
Sickness becomes very sensitive problem in India
Creates adverse problem to industrial health and economy
Sickness covers all types of units in small, medium and large
sectors
MSME
Magnitude of Industrial Sickness in India
Industrial sickness is growing at an annual rate of about
28% and 13% respectively in terms of No. of units and
outstanding number of bank credit

It is estimated that as of today there are more than 5 Lacs

sick units in SSI and more than 1 Lac in Med & Large
Scale Industry

Nearly 29000 units are added to sick list every year

Over Rs.75000 crores of banks funds locked up

Definition
An industrial Co. (being registered for not less than 5 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

According to Companies Act, 2002:

Sick Industrial Co. means an industrial company which has:
i) The Accumulated losses in any financial year equal to
50% or more of its average net worth during four years
immediately preceding such financial year or
ii) Failed to repay its debts within any three consecutive
quarters for its repayment
Definition
State Bank of India has defined a sick unit as:
One which fails to generate an internal surplus on a
continuous basis and depends for its survival upon frequent
infusion of funds

Sick Industrial Companies Act, 1985:

A unit is defined as sick industrial company where:
A company is registered for not less than seven years
It incurred cash losses for the current and preceding
financial year.
Its net worth was eroded.
Even 50% or more of the net worth of the past 5 financial
years is eroded because of accumulated losses
What is Sickness?
Consistent losses result along with:
Underutilization of productive capacity
Lack of product demand
Loss of revenue
Over staffing
Possible loss of exports

Reasons contribution to sickness:

Selection of project without proper feasibility study
Outdated technology
Defective machinery
Problem with marketing
Location problem
Lack of skilled manpower
Non-availability of working capital
Delay in financing decision and loan disbursement
Natural disasters
Power shortage
Frequent changes in exchange rates
Management inefficiency, etc.
Stages of Sickness
Stage I (Normal / Healthy)
Good cash profits
Satisfactory Debt Equity Ratio

Stage II (Tending towards sickness):

Decline in profits during last year
Losses estimated in current year

Stage III (Incipient Sickness)

Two or more financial indicators become negative
Cash loses, current ratio, Debt-equity ratio, Loan repayment, etc.

Stage IV (Final Stage)

Erosion of net work by 50% & more
Units being closed for total period of 6 months & more
Types of Sickness

Born & Achieved Sickness

Causes of Sickness
Adverse effects of Industrial Sickness
Effects Banks & Financial Institutions
Wastage of Scarce Resources
Effect on Employment Opportunities
Adverse Effect on Prospective Investors & Entrepreneurs
Wastages of Scare Resources
Loss of Revenue to Government
Emergence of Industrial Unrest
Adverse impact on related units
Remedial Measures
Role of:
Term Lending Institutions
Commercial Banks
Entrepreneur
Government
RBI
Role of Term-Lending/Fin Institutions
Continuous monitoring of units
Careful project appraisal
Professional institutional response to units problems
Incentives
Management running support
Other support
Role of Commercial Banks
Additional working capital assistance
Recovery of interest at reduced rates
Suitable delay on collection of interest
Freezing a portion of outstanding in the accounts
Defining a special cell in the RBI
Arranging Special Committee of State level in the local
branch for link between financial institution and government
agency
Organizations / Agencies set up are:
Sick industrial undertaking cell
State level inter-institutional committees
Standing coordination committee
Special cell rehabilitation finance division of IDBI
Role of Entrepreneurs
Management Board
Partners in Enterprise
Regular Audit
External Assistance
Others
Role of Government
Detection of sickness at an early stage
Giving high facilities to large industry who take over the
small sector for revival
High liberalizations in terms of financial rather than
intervention
Introduction of various schemes for sick industry
Tax benefits
Introduction of margin money scheme
Various policies introduced:
Soft loan scheme
Industrial Policy 1977
Merger Policy 1977
SICA, 1985
Role of RBI
Rehabilitation packages
Advising and providing assistance to banks
Monitoring industries on timely basis
Excise loan policy 1989 grant of excise loan to weak
and sick industrial units
Setting up of IRCI (Industrial Reconstruction Corporation
of India.)
Conversion of IRCI into IRBI in March 20,1985
Conversion of IRBI into IIBI in March 27, 1997