Sickness in small and medium enterprises (SMEs) is a serious problem that wastes resources and impacts economic growth. Sickness progresses through stages from a healthy normal stage to a final sick stage. It is caused by both internal factors like poor management and external factors like changes in government policy. Preventive measures include careful project appraisal, monitoring of warning signs, and addressing deficiencies. The government has established a framework for revival and rehabilitation of sick SMEs through identification of stress, corrective action plans, and restructuring processes. Early detection and intervention are important to prevent sickness from worsening.
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
1. Born Sick
2. Become Sick
3. Made Sick
10. Causes
1. 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
1. 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 29th 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.
