Industrial Sickness: Criteria, Causes and Government Policy

Let us make an in-depth study of Industrial Sickness :- 1. Criteria of Sickness 2. Causes of Industrial Sickness 3. Government Policy.

Criteria of Industrial Sickness:

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 last year of its operation and in the judgement 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 from plough back). As a general rule, the sick units continue to operate below the break-even point and are, thus, forced to depend on external sources of funds for their long-term survival.

In order to examine the bottlenecks in industrial and corporate restructuring and to suggest suitable measures for the early closure of unviable units and quick revival of viable ones, the Government appointed a Committee on Industrial Sickness and Corporate Restructuring in May 1993 under the chairmanship of Onkar Goswami. It submitted its report in July 1993.

The Committee suggested a change in the definition of sickness:

(i) Default of 180 days or more on repayment to term-lending institutions, and

(ii) Irregularities in cash-credits or working capital for 180 days or more.

External and Internal Causes of Industrial Sickness:

Industrial sickness has become a major problem of the Indian corporate industrial 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.

The causes of industrial sickness may be divided into two broad categories:

(i) External, and

(ii) Internal

External causes are those which are beyond the control of its management, and seem to be relatively more important than internal causes.

The external causes which have been identified so far include:

(a) Delay in land acquisition and building construction;

(b) Delay in obtaining financial assistance from public financial institutions;

(c) Delayed supply of machinery by the manufacturers;

(d) Problems related to recruitment of technical and managerial staff;

(e) Dilatoriness on the part of the government in sanctioning licences, permits, etc.;

(f) Shortages of basic inputs like power. Other causes include;

(g) Cost overruns due to factors beyond the control of management;

(h) Lack of demand for products or shift of demand to products of rival firms due to delays in project implementation;

(i) Unsatisfactory performance by collaborators— financial and technical; and, last but not the least,

(j) Changes in the policy of the Government relating to movement of goods from one place to another within the country, or the Government’s export-import policy.

Internal causes are many. The primary one seems to be (i) “lack of experience of the promoters in the line of activity.” The other causes are: (ii) differences among various persons associated with the promotion and management of the enterprise; (iii) mechanical defects and breakdown; (iv) inability to purchase raw materials at an economic price and at the right time; (v) failure to make controls effective in time in case of deficiencies in workings; (vi) deteriorating labour management relations and the consequent fall in capacity utilisation, and, above all; (vii) faulty financial planning and lack of balance in the financial (capital) structure.

It is often observed that many projects are started without making any proper feasibility study. Hardly any long-term view of the future is taken. Often industrial projects are started on an ad hoc basis without gathering much about the expertise and competence needed for the purpose.

Internal causes for sickness are summarised as:

(i) Project appraisal deficiencies,

(ii) Project management deficiencies, and several external factors like,

(iii) Shortage of raw materials,

(iv) Power crisis,

(v) Changes in government policy,

(vi) Transport and financial bottlenecks,

(vii) Increase in overhead costs, etc.

Marketing problems in the form of market saturation, product obsolescence and demand recession are considered to be other factors responsible for industrial sickness.

Incidence:

As at the end of March 2006, the total number of sick units stood at 1,31,553 units involving an outstanding bank credit of about Rs. 38,819 crore. 1,26,824 units (i.e., 99 p.c.) were in the small scale sector. Of these, their share in the aggregate locked in bank credit was only 17.5 p.c. The three major industries affected by industrial sickness are jute, engineering goods, and textiles.

Government Policy to Deal with Industrial Sickness:

The policy framework in respect of measures to deal with the problem of industrial sickness has been laid down in the guidelines issued in October 1981 (which were subsequently modified in February 1982) for guidance of administrative ministries of the Central Government, State Governments, and financial institutions.

The Central Government has set up a Board for Industrial and Financial Reconstruction (BIFR) with effect from January 12, 1987 in pursuance of enactment of the SICA—Sick Industrial Companies (Special Provisions) 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 need to be taken with respect to sick and potentially viable companies.

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. Since its inception (1987) up to the end of March 1998, BIFR received 7,7,158 applications. It is to be remarked here that the number of cases being registered with the BIFR has been decreasing gradually.

Till October 2002, the Board has sanctioned rehabilitation schemes of 748 central and state PSUs. It has so far recommended Winding up of 1,303. A small set of 485 companies have been declared no longer ‘sick’ and have been discharged from the purview of SICA, since net worth of these public and private companies turned positive after the implementation of rehabilitation schemes.

The Industrial Reconstruction Bank of India (IRBI) set up in 1985 has initiated various steps for checking the growth of industrial sickness and helping in industrial revival. Out of 393 units assisted by the IRBI till the end of June 1986, 136 units have been revived. By March 1997, cumulative financial assistance sanctioned and disbursed stood at Rs 4,312 crore and Rs 2,954 crore, respectively.

The IRBI was taken over by the Industrial Investment Bank of India in 1997. It functions as the principal credit and reconstruction agency for industrial revival. A significant measure taken during 1986 was the setting up of Small Industries Development Fund (SIDF) in the IDBI. This is meant to provide special financial assistance to the small-scale sector.

The Government has set up two funds, the Textile Modernisation Fund and the Jute Modernisation Fund—for modernisation in the textiles and jute sector. Under these two funds, assistance is provided not only to the healthy units for modernisation at 11.5 p.c. rate of interest, but also to sick but potentially viable units. Special loans are given to the weak units for meeting a part of the promoters’ contribution. These special loans carry 6 p.c. rate of interest with a repayment period of 12 years and an initial moratorium period of 6 years.

Meanwhile, the Government appointed a ‘Committee on Industrial Sickness and Corporate Restructuring’ in 1993 under the chairmanship of Onkar Goswami. The Committee recom­mends liquidation of sick concerns instead of their rehabilitation.

Government is now considering the repeal of SICA and winding up of the BIFR. It is feared that, in view of the 2008 recession, in the immediate future large number of sick units would be closed down thereby raising the bogey of unemployed workers.