Industry sickness

Industry sickness

1. Sickness in SMEs Unit-4

2. Introduction to Sickness Industrial sickness is a global phenomenon through its incidence in the developed countries of the world may be low as compared to the less developed countries. Crores of rupees are blocked in terms of sick units and also affects national growth. In fact, industrial sickness pervades all around and is posing a very serious problem to different sectors of the economy. Sickness of an industry generally starts with the gradual erosion of its liquidity due to cash losses on continuing basis, and thereby deterioration in debt, equity and current ratios. The root cause is poor management, and the resultant causes deterioration in finance.

3. Definition of Sickness RBI defined the Sick Unit as: A unit which has incurred cash losses for one year and in the judgement of the bank, it is likely to continue to incur cash losses for current year as well as following year and which has an imbalance in its financial structure such as current ratio is less than 1:1 and worsening debt-equity ratio Kohli Committee given latest definition on behalf of RBI as, “ an MSE is considered sick when any of the borrowal account of the enterprise remains NPA for three months or more or there is erosion in the net worth due to accumulated losses to the extent of 50% of its net worth.

4. Indicators of Sickness Capacity utilization declines Short term obligations can’t met for shortage of liquidity Inventories become excessive for declining sales Non submission of data to bank and other financial institutions Irregularity in bank account Frequent breakdowns in plants and equipment's Quality of product and services is declined Unavailability of necessary technology Short term borrowings at highest interest rates Delay in finalization of accounts High turnover of personnel especially at senior levels

5. Stages of Sickness There are four stages of sickness Stage-1 (Normal/Healthy) Stage-2 (Tending Towards Sickness) Stage-3 (Incipient Sickness) Stage-4 (Final Stage) Stage-1 (Normal/Healthy) A unit is called normal when all its functional areas like production, marketing, finance, and personnel are functioning efficiently. generating good cash profits, positive value of net working capital or current ratio more than 1 positive value of net worth, Satisfactory debt equity ratio

6. Stages of Sickness Stage-2 (Tending Towards Sickness) industrial unit tends towards sickness, initial failures in functional areas begin, or face external constraints. Due to this cash profits were decline. Although the unit have positive value of net working capital and net worth may not listed as defaulter in the records. this stage conveys first warning signal which should be taken cautiously and preventive measures with close monitoring and follow up actions should be launched promptly by the management and the other associated agencies. Decline in profit during last year Losses estimated in the current year

7. Stages of Sickness Stage-3 (Incipient Sickness) in this stage an industrial unit incurs cash losses but imbalance in financial structure may or may not appear. In other wards, two or more financial indicators may become negative and its value may show warning signal of sickness. Deterioration in above functional areas continues Cash losses incurred in last year are expected in current year also Deterioration anticipated in current year although current ratio was more than one during last year Deterioration anticipated in debt equity ratio during current year

8. Stages of Sickness Stage-4 (Final Stage) when suitable measures are not taken at incipient stage it effects the production, finance, marketing and personnel areas, the unit, finally become sick. at this stage all financial indicators such as cash profit/loss net working capital, net worth depict negative results Units functional areas have become ineffective Cash losses were incurred last year, expected current year and next year also Current ratio is less than one Debt-equity ratio has worsened Erosion of net worth by 50% and more Units being closed for a total period of 6 months and more during past year Default in payment of loan instalment

9. Causes of Sickness The nature and causes of sickness differ from industry to industry, area to area, size to size. As per the nature of the sick unit, it can be categorized into three groups Born Sick Become Sick Made Sick

10. Causes Born Sick: sickness is not always a post-implementation feature, some industrial projects are born sick from the very inspectional cases Ill-conceived projects Bad planning and poor appraisal Wrong choice of location and product selection Inadequate market surveys false fixed investment decision and one customer-one product type situation

11. causes 2. Become Sick some industrial projects are may become sick due to internal causes. In such circumstances, sickness starts at last stage of the project implementation as a result of poor management and deliberate diversion of the funds. The factors are like wrong recruitment and faulty management policies are responsible for this. 3. Made Sick in this case sickness identified due to external causes like Sudden changes in govt policies Technological changes Macro-political, social, and economical problems Weak management policies

12. Internal causes Lack of finance: due to weak equity, poor utilization of assets, inefficient working capital management Bad Production Policies: due to wrong selection of site related to production, inappropriate plant and machinery bad maintenance lack of quality Marketing and Sickness: wrong demand forecasting, selection of inappropriate production mix absence of product planning wrong market research methods Inappropriate personnel management: bad wages and salary administration, bad labor relations, lack of behavior approach

13. Internal causes Inefficient corporate management: improper corporate planning, lack of integrity in top management, lack of coordination and control Mismanagement: faulty managerial decisions regarding production, finance, marketing and personnel and poor control Faulty initial planning: wrong location of an industrial unit might lead to its ruin, lack of infrastructural facilities. Improper choice of technology: improper choice of technology, unsuitable product mix and single product technology contribute to industrial sickness

14. External Causes Personnel constraints: non availability of skilled labour or manpower, wage disparity, due to this decline in productivity, deterioration in quality, increase of waste, rise in overhead costs etc ,. Marketing constraints: due to liberal licensing policies, restraint of purchase by bulk purchases changes in global market Production constraints: due to shortage of raw material, power and transport shortage of external factors for sickness, delay in disbursement of loan by govt Changes in govt industrial policies: changes from time to time Lack of demand for the product: heavy and sudden restraint on the bulk purchases of the products of some industries

15. External Causes Recessionary trends prevalent in the economy: recession or inflation hovering in the economy. Power cuts: power cuts are necessary due to much below generation of its actual requirements. Erratic supply of inputs: lack of supply of regular raw material Other causes: obsolescence of article produced, lack of organized marketing devices, entry of large scale enterprises, abrupt changes in govt policies, infrastructure bottlenecks etc.

16. Preventive measures The prevention of sickness depends on the role of these agencies 1. term lending institutions 2. Commercial Banks 3. Entrepreneur 4. Government Role of Term lending Institutions: the task of the term lending institutions to avert sickness commences with the identification of the sick unit at the initial stage. . Managemnet appraisal banning industries not having scope machinery and equipment satisfactory implementation

17. Preventive measures 2. role of commercial banks commercial banks can detect early warning signal of sickness and take suitable and timely action to prevent the incidence of sickness. careful proper appraisal timely disbursement of funds feedback from commercial banks warning signals market intelligence stemming sickness 3. Role of the entrepreneur: it is the sole responsibility of the entrepreneur to avert sickness and he can do so by paying adequate attention to the deficiencies of the project. Board Management

18. Preventive measures The role of the Govt : when several changes are made successively in the industrial policy by the Government, it not only may discourage new investment but also upsets further plans causing sickness in the established units. sudden changes in industrial policy resistance to change power to change concessions

19. Framework for rehabilitation of SMEs The Ministry of Micro, Small, & Medium Enterprises has notified a framework for revival and rehabilitation of MSMEs on 29 th may 2015 in the Gazette of India vide notification number S.O. 1432€, in exercise of the powers conferred under section 9 of MSMED Act,2006 Identification of incipient stress Committees for distressed Micro, small and Medium Enterprises Corrective Action Plan (CAP) by the Committee Options under corrective Action Plan Restructuring process Prudential norms on Asset classification and provisioning Wilful defaulters and non-cooperative borrowers Review

20. Conclusion Industrial sickness has brought disastrous consequences leading to huge wastage of resources, unemployment, labour unrest and loss of revenue to the govt. Sickness should be detected at the initial stages and it requires stern legal and economic measures on the part of the Govt and the related agencies.