SYMPTOMS OF SICKNESS

According to RBI, "a sick unit is one which incurs cash losses for one year and which , in the judgment of bank , is likely to incur losses for the current year as well as the following year, and which has an imbalance in its financial structure, such as a current Ratio of less than 1:1 and worsening debt-equity ratio (total outside liability to net-worth.)

In the Sick Industrial Companies Act. 1985 (special provision), a sick industrial company has been defined as follows: "An industrial company (being a company registered for not less than 7 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 such financial year and the financial year immediately preceding such financial year."

Although not covered by the Act, the government has identified another category of units called weak units. These are the units, which are the incipient stage of sickness. A weak units is termed as such if at the end of any accounting year, if has:

i. Accumulated losses equal to or exceeding 50 % of its peak net-worth,

ii. A current debt equity ratio is less than 1:1 and,

iii. Suffers cash losses in the immediately preceding years. 

Delay or default in payment of suppliers Irregularity in the bank account delay or default in payment to banks & financial institution Non submission of information to banks Frequent request to banks for additional credit Decline in capacity utilization Poor maintenance of plant and machinery Low turn over of assets Accumulation of inventories Inability to take trade discounts Excessive turn over of personnel Unhappy human resources Extension of accounting period Resort to "creative accounting" which seeks to present a better financial picture then what it really is Decline in the price of equity shares and debentures

Tabling into consideration the above definition of sick industrial units, the following features may be identified with such a unit:

• Loss Criterion: - A sick unit is one that has incurred cash losses in the immediately preceding two years and in the judgment of credit institutions, is expected to incur losses during the current year. This is called the loss criterion.
• Net worth Erosion: - A sick unit whose net worth (paid up share capital plus reserves) has been eroded to the extent of at least 50 %. This is called net worth erosion.
• W.K. Criterion: - A sick unit whose working capital advance account with the bank is irregular and this persisted over a period of time, say 12 to 18 months and likely to become more persistent. This may be called working capital criterion.
• Defaulter Criterion: - A sick unit which has defaulted in paying four consecutive half yearly installments of principle and interest on term loans, if any .

                                                                                               

FEW OTHER GUIDELINES

We shall now focus our attention on the factors responsible for industrial sickness in the non-SSI sector first, then on the SSI sector.

Non-SSI Sector :-These are divided into two categories : Exogenous factors, and endogenous factors.

Some of the EXOGENOUS FACTORS relate to such factors as government policies pertaining to production, prices and distribution. Further, shortage of power, transport, raw materials, change in investment plan, deteriorating industrial relations are some other factors to be noted in this connection.

The most important ENDOGENOUS FACTOR causing industrial sickness has been weak management or mismanagement.

Managerial faults and failures thus contributed a lot towards causing industrial sickness .

Other endogenous factors may be summarily stated as follows:

• Bad planning.
• Overestimation of demand.
• Diversion of funds.
• Excessive overheads.
• Insufficient provision for depreciation.
• Wrong dividend policy.

 

SSI Sector: - We deal with the major factors causing sickness in the small industrial sectors.

1.     Easy approval of small-scale units without adequate scrutiny by state agencies also results in sickness. This underscores the fact that assessment of viability of the project is not made with adequate care, more especially with regard to financial viability.

2.     Inadequate assessment of market and poor marketing strategy is another factor contributing to industrial sickness.

3.     Inadequate production planning & control and poor financial planning and management in respect of small-scale unit is an important reason for sickness.

4.     Non-payment by the 'principles' (usually large & medium scale units) to the ancillaries (SSI Units) has been noted as an important cause of small industry sickness.

5.     Lake of management experience is an important cause of sickness. Young entrepreneurs start enterprises with unrealistic ideas. They keep overhead costs high. They borrow funds at high interest rates.

6.     Scant regard for the basic principles of business management is another major cause of sickness. To start enterprise with a low equity base is a negation of healthy business management practice.

7.     Lack of working capital, inadequate demand and non-availability of raw materials in sufficient quantities result in under-utilization of capacity and sickness in the small-scale units.