Industrial sickness

One of the adverse trends observable in the corporate private sector of India is the growing incidence of sickness. It is causing considerable concern to planners and policymakers. It is also putting a severe strain on the economic system, particularly on the banks.

There are various criteria of sickness. According to the criteria accepted by the Reserve Bank of India “a sick unit is one which has reported cash loss for the year of its operation and in the judgment of the financing bank is likely to incur cash loss for the current year as also in the following year.”

A major symptom of sickness is a steady fall in debt-Equity ratio and an imbalance in the financial position of the unit. Simply put, a sick unit is one which is unable to support itself through the operation of internal Resources (that is, earnings plough-back). As a general rule, the sick units continue to operate below the break-even point (at which total revenue = total cost) and are, thus, forced to depend on external sources for funds of their long-term survival.

Industrial sickness creates various socio-economic problems. When an industrial unit falls sick those who depend on it have to face an uncertain future. They fear loss of jobs. Even if they do not lose jobs they do not get their wages and compensation in time and are, thus, forced to live in extreme hardship.

Of course, sickness is not a special problem of India. It is, undoubtedly, a global phenomenon. Even in industrially advanced countries there are numerous cases of bankruptcy or liquidation. These sick units are nursed back to Health through mergers, amalgamations, takeovers, purchase of assets, or outright nationalisation. When the-problem becomes really alarming or unmanageable, the unit is permitted to die its natural death.

Causes

Industrial sickness has become a major problem of the India’s corporate private sector. Of late, it has assumed serious proportions. A close look reveals that there are, at least, five major causes of industrial sickness, viz., promotional, managerial, technical, financial and political.

An industrial unit may become sick at its nascent stage or after working for quite some time. For instance, two major traditional industries of India, viz., cotton textiles and sugar, have fallen sick largely due to short-sighted financial and depreciation policies. Heavy capital cost escalation arising out of price Inflation accentuates the problem. The historical method of cost depreciation is highly inadequate when assets are to be replaced at current cost during inflation.

Moreover, since the depreciation funds are often used to meet working capital needs, it does not become readily available for replacement of worn-out plant and equipment. The end result is that the industrial unit is constrained to operate with old and obsolete equipment, its profitability is eroded and, sooner or later, the unit is driven out of the market by the forces of competition.

In Dec. 1980 the total number of sick units was 24,550, involving outstanding bank credit of Rs. 1,809 crores. As at the end of March 2000, the total number of sick units stood at 307,399 involving an outstanding bank credit of about Rs. 23,656 crores. Of these 14,793 were potentially viable, 278,423 were non-viable and the viability of the remaining 14,183 has not been decided.

Three major industries affected by industrial sickness are jute, engineering goods and textiles. Some of the industries such as the real estate, Light consumer goods, automobile, diamonds and many others are reeling under the impact of steep fall in demand, inadequate supply of finance, large proportion of non-performing assets and constraints of finance due to huge amounts of funds getting blocked in ageing receivables.

Government Policy

A number of measures have been taken to tackle the problem of industrial sickness. The importance of detection of sickness at the incipient stage has been emphasised by the RBI. The policy framework in respect of measures to deal with the problem of industrial sickness has been laid down in the guidelines issued on October 1981 (which were subsequently modified in February 1982) for guidance of administrative ministries of the Central Government, State Governments and financial institutions.

The salient features of these guidelines are the following:

The administrative ministries in the Government will have specific responsibility for prevention and remedial action in relation to sickness in Industrial Sector within their respective charges. They will have a central role in monitoring sickness and coordinating action for revival and rehabilitation of sick units. In suitable cases, they will also establish Standing Committees for major industrial sectors where sickness is widespread;
The financial institutions will strengthen the monitoring system so that it is possible to take timely corrective action to prevent incipient sickness. They will obtain periodical returns from the assisted units and from the Directors nominated by them on the Boards of such units. These will be analysed by the Industrial Development Bank of India and results of such analyses conveyed to the financial institutions concerned and the Government.
The financial institutions and banks will initiate necessary corrective action for sick or incipient sick unit based on a diagnostic study. In case of growing sickness, the financial institutions will also consider taking of management responsibility where they are confident of restoring a unit to health. The Ministry of Finance will have to issue suitable guidelines for management;
Where the banks and financial institutions are unable to prevent sickness or ensure revival of a sick unit, they will deal with their outstanding dues to the unit in accordance with the normal Banking procedures. However, before doing so, they will report the matter to the Government which will decide whether the unit should be nationalised or whether any other alternative- including workers’ participation in management— can revive the undertaking.
Where it is decided to nationalise the UNdertaking, its management may be taken over under the provisions of the Industries (Development and Regulation) Act, 1951, for a period of six months to enable the Government to take necessary steps for nationalisation.

Establishment of BIFR

The Central Government has set up a Board for Industrial and Financial Re-construction (BIFR) with effect from 12 January 1987 in pursuance of enactment of the Sick Industrial Companies (Special Provision) Act, 1985. This is a major step for intervening at an early stage and detecting, preventing, as well as taking ameliorative, remedial and such other measures which to be taken with respect to sick and potentially viable companies.

The role of the Board for Industrial and Financial Reconstruction (BIFR) needs a re-look in the face of a steep rise in the number of industries turning sick. BIFR was constituted to facilitate the revival of industries deemed sick. When an Industry turns sick, BIFR acts as an operating agency (generally the lead financial institution having the largest loan exposure among the creditors) to devise a revival strategy proposal.

Progress in the right disposal of sick company cases registered with BIFR has been slow on account of the conflicting interests between the companies and the creditors (banks and financial institutions, government bodies/agencies) and certain lacunae in the SIC A Act. The rehabilitation schemes met with 40-45% failure, as a result of which many of the cases had to be reopened.

The rate of registration/sickness increased substantially during 1997-98 due to (a) the recessionary trends prevalent in industry, (b) poor financial market conditions, and (c) the tough stance taken by banks/financial institutions (FIs) towards defaulters/potentially sick companies under their non-performing assets (NPA) accounts for rescheduling of repayments, etc.

Industrial sickness is a condition in which a company is unable to meet its financial obligations and is in danger of closing down. It can be caused by a number of factors, including poor management, economic downturns, and technological changes.

The symptoms of industrial sickness include a decline in sales, profits, and market share. The company may also experience cash flow problems, mounting debts, and a loss of confidence among employees and investors.

Industrial sickness can have a number of negative effects on the economy, including job losses, a decline in tax revenue, and a loss of confidence in the business sector. It can also have a negative impact on the local community, as businesses that close down can lead to Unemployment and a decline in economic activity.

There are a number of remedies that can be used to address industrial sickness, including financial restructuring, mergers and acquisitions, and government assistance. Financial restructuring involves the renegotiation of debts and the sale of assets to raise cash. Mergers and acquisitions involve the combination of two or more companies. Government assistance can take the form of loans, grants, and tax breaks.

There are a number of things that can be done to prevent industrial sickness, including good management, Sound financial planning, and innovation. Good management involves setting clear goals, developing effective strategies, and monitoring performance. Sound financial planning involves forecasting cash flows, managing debt, and investing wisely. Innovation involves developing new products and Services, and improving existing ones.

Industrial sickness is a serious problem that can have a significant impact on the economy and the community. However, there are a number of remedies and preventive measures that can be used to address it.

Table of Contents

Causes of Industrial Sickness

There are a number of factors that can contribute to industrial sickness, including:

Poor management: One of the most common causes of industrial sickness is poor management. This can include factors such as making poor decisions, not investing in new technology, and not keeping up with market trends.
Economic downturns: Economic downturns can also lead to industrial sickness. When the economy is in a Recession, businesses often see a decline in sales and profits. This can make it difficult for businesses to meet their financial obligations and can lead to bankruptcy.
Technological changes: Technological changes can also lead to industrial sickness. When new technologies are developed, they can make existing products and services obsolete. This can force businesses to invest in new technologies or risk being left behind.
Competition: Increased competition can also lead to industrial sickness. When there are more businesses competing for the same customers, it can be difficult for businesses to maintain their market share. This can lead to a decline in sales and profits, which can make it difficult for businesses to meet their financial obligations.
Government policies: Government policies can also contribute to industrial sickness. For example, if the government imposes high taxes or regulations on businesses, it can make it difficult for businesses to operate profitably.

Symptoms of Industrial Sickness

There are a number of symptoms that can indicate that a business is suffering from industrial sickness. These include:

Declining sales: One of the most common symptoms of industrial sickness is declining sales. This can be seen in a decrease in the number of units sold or in the total dollar value of sales.
Declining profits: Another common symptom of industrial sickness is declining profits. This can be seen in a decrease in the amount of Money that a business makes after all expenses have been paid.
Mounting debts: Businesses that are suffering from industrial sickness often have mounting debts. This can be due to a number of factors, such as poor management, economic downturns, or technological changes.
Loss of confidence: Businesses that are suffering from industrial sickness often lose the confidence of their employees, investors, and customers. This can make it difficult for businesses to attract new capital or to retain their existing customers.

Effects of Industrial Sickness

Industrial sickness can have a number of negative effects on the economy, the community, and the businesses themselves. These include:

Job losses: One of the most serious effects of industrial sickness is job losses. When businesses close down, they often lay off their employees. This can lead to unemployment and economic hardship for the workers and their families.
Loss of tax revenue: Businesses that close down also stop paying taxes. This can lead to a loss of tax revenue for the government, which can make it difficult for the government to provide essential services.
Loss of confidence in the business sector: Industrial sickness can also lead to a loss of confidence in the business sector. This can make it difficult for businesses to attract new capital or to retain their existing customers.
Negative impact on the local community: Businesses that close down can also have a negative impact on the local community. This can include a decline in economic activity, a loss of jobs, and a decline in property values.

What is a business?

A business is an organization that provides goods and services to customers. Businesses can be small, medium, or large, and they can be privately owned or publicly traded.

What are the different types of businesses?

There are many different types of businesses, but some of the most common include:

Sole proprietorships: A sole proprietorship is a business that is owned and operated by one person.
Partnerships: A PARTNERSHIP is a business that is owned and operated by two or more people.
Corporations: A corporation is a business that is owned by its shareholders.
Limited liability companies (LLCs): An LLC is a business that is owned by its members and has limited liability.

What are the benefits of starting a business?

There are many benefits to starting a business, including:

The ability to be your own boss
The potential to make a lot of money
The opportunity to be creative and innovative
The chance to make a difference in the world

What are the challenges of starting a business?

There are also many challenges to starting a business, including:

The risk of failure
The long hours and hard work required
The need to raise capital
The competition from other businesses

How do I start a business?

If you’re thinking about starting a business, there are a few things you need to do:

Come up with a great idea.
Do your research.
Create a business plan.
Get funding.
Build a team.
Market your business.
Manage your business.

What is the difference between a business and an organization?

A business is an organization that provides goods and services to customers in exchange for money. An organization is a group of people who come together to achieve a common goal.

What are the different types of organizations?

There are many different types of organizations, but some of the most common include:

Nonprofit organizations: Nonprofit organizations are organizations that are not formed for the purpose of making a profit.
Government organizations: Government organizations are organizations that are formed by the government to provide services to the public.
Business organizations: Business organizations are organizations that are formed to make a profit.
Religious organizations: Religious organizations are organizations that are formed to promote a particular religion.

What are the benefits of being a part of an organization?

There are many benefits to being a part of an organization, including:

The opportunity to meet new people
The opportunity to learn new things
The opportunity to make a difference in the world
The opportunity to have fun

What are the challenges of being a part of an organization?

There are also some challenges to being a part of an organization, including:

The need to follow the rules and regulations of the organization
The need to contribute to the organization
The need to deal with conflict within the organization

What is the future of business?

The future of business is uncertain, but there are some trends that are likely to continue, including:

The Growth of the digital economy
The rise of Artificial Intelligence
The increasing importance of sustainability
The growing demand for personalization

What is the future of organizations?

The future of organizations is also uncertain, but there are some trends that are likely to continue, including:

The increasing importance of collaboration
The growing need for agility
The rising demand for transparency
The increasing importance of diversity and inclusion

Question 1

A company is said to be sick when it

(a) is unable to pay its debts
(b) is making losses
(c) is not able to meet its financial obligations
(d) all of the above