INDUSTRIAL SICKNESS

Universal phenomenon.
More easily manifested in market
economies.
May be concealed in a controlled
economy.
Fear Liberalization leading to cut
throat competition would increase
industrial sickness.
Matter of serious concern affects the
owners, employees, creditors, suppliers

INDUSTRIAL SICKNESS
Sickness a relative concept may not
show clear cut signals and may manifest
itself in different forms.
Sick means NOT healthy.
To an investor not paying good
dividends, low market value.
To an industrialist making losses or not
earning high profits.

INDUSTRIAL SICKNESS
To a banker Cash losses in the
previous year and likely to repeat in the
current year. As per RBI guidelines an
industrial unit is regarded as sick if it has
incurred cash loss for one year and in
the judgment of the bank, it is likely to
continue to incur cash loss in the two
following years and it has imbalance in
its financial structure, such as current
ratio being less than 1:1 and worsening
debt equity ratio.

INDUSTRIAL SICKNESS
The Sick Industrial Companies (Special
provisions) Act 1985 as amended in 1993,
defines a sick industrial company as a
company (being a company registered for not
less than 5 years) which has at the end of any
financial period accumulated losses equal to
or exceeding its entire net worth. The
definition is for the purpose of application of
the Act which covers only registered
companies which have been in existence for
at least seven years.

INDUSTRIAL SICKNESS
Common symptoms :
(a) Failure to pay statutory liabilities viz. PF and
ESI contributions
(b) Failure to pay timely installment on loans
taken
(c)Increase in inventories with a large number of
slow or high moving items
(d) high rate of rejection of goods manufactured
(e) Low capacity utilization
(f) Frequent industrial disputes.

INDUSTRIAL SICKNESS
It is important to detect sickness at the first stage and
take remedial measures. The RBI has therefore advised
the commercial banks to take remedial measures in
respective units at the stage of 50% erosion of their net
worth. Such units are called Weak units to distinguish
them from the sick units.
An industrial unit is termed as weak if at the end
of any accounting year it has (a) accumulated
losses equal to or exceeding 50% of its peak net
worth in the immediately preceding 5 accounting
years.(b) current debt equity ratio is less than
1:1 (c) suffers a cash loss in the immediately
preceding accounting year.

INDUSTRIAL SICKNESS
YEAR

SSI(WITH BANK
CREDIT)

NON-SSI

1982

58551

1622

1991

221000

2337

1992

246000

2149

1998

224000

2476

1999

MORE THAN 300000

1792

CAUSES OF SICKNESS
They may become sick at different stages
and due to different reasons. Some are
BORN SICK some ACHIEVED
SICKNESS and some have SICKNESS
THRUST UPON THEM.

BORN SICK : A study conducted by the

Institute of Economics, Hyderabad found
that 50% of the dead units, closed within
three years of opening. This gives us a
signal that these units never had any
reasonable survival prospect right from
birth.

CAUSES OF SICKNESS
Causes :
Inexperienced promoters, wrong
selection of project, faulty project
planning etc. Example : Mushrooming growth
in the number of so called consultancy firms.
ALSO A CAUSE.
Paucity of funds, faulty financial
management , inadequate provision for
contingencies and faulty cash and fund
flow estimates Many new units have been
found to be underutilized. There are cases
where there is heavy investment in nonproductive capital assets like staff housing
projects etc.

CAUSES OF SICKNESS
Time and cost overruns Particularly
in case of large projects -- delay in
commissioning due to delay in supply of
equipments and other reasons. Such
delays cost escalations resulting in
capital shortage, liquidity problems,
increase in cost of production etc.
Location problems There are
examples where a high technology based
unit is located in area without supporting
infrastructure and skilled manpower.

CAUSES OF SICKNESS
Improper Technology or technology
becoming obsolete, sub-standard
machinery, wrong collaboration.
According to the Tiwari committee 14% of
the large sick units suffered from
technical factors and faulty initial
planning.
Wrong assessment of market
potential, faulty demand forecasting,
change in market conditions, change
in consumer tastes and preferences
may also cause birth of sick units.

CAUSES OF SICKNESS
ACHIEVED SICKNESS : These fail after
becoming operational due to internal
causes. Following are some of the internal
causes :
a) Bad management inexperience,
inefficiency,
lack of professional expertise, neglect,
internal disputes, dishonesty. The Tiwari
committee observed that 65% of the large
sick units were affected by this problem.
b) Unwarranted expansion and diversion
of resources :

CAUSES OF SICKNESS
c) Poor inventory management :
d) Failure to modernize and adopt
desirable strategies : product mix,
marketing mix etc.
e) Poor labor management relationship :
EXTERNAL CAUSES : Beyond the control of
the management.
a) Energy crisis,
b) Shortage of raw materials,
c) Transport bottlenecks,
d) Credit squeeze shortage of working capital.

CAUSES OF SICKNESS
e) Government controls on products and
prices.
f) Unfavorable Govt. policy and labor attitude.
Rehabilitation packages suggested by BIFR for
several sick units include such measures as
closing down certain divisions or lines of
business, modernization, rationalization, sale
of assets, labor force curtailing etc. in order
to generate funds. The pity lies in the fact
that when such schemes are implemented
there is always a tremendous opposition
from the trade unions/ political lobbies.

CAUSES OF SICKNESS
Further, the swiftness with which the
Govt. machinery responds to grave
industrial problems is indicated by the
fact that it took three years to establish
BIFR after the Tiwari committee
recommended for such measure.
BIFR has been functioning for years
without producing significant results and
there is now a confusion on the issue, as
to whether the Sick Industrial Companies
Act and BIFR be scrapped or not.