Industrial Sickness Causes

What is Industrial Sickness?

An industrial unit tends to show signs of financial distress starting with: short term liquidity problems; revenue losses; operating losses; and moving in the direction of over use of external credit. until it reaches a stage where it is overburdened with debt and not being able to generate sufficient funds to meet its obligation.

Industrial Sickness Definition:

1. According to RBI:A sick unit is that which has incurred a cash loss for one year and is likely to continue incurring losses for the current year as well as in the following year and the unit has an imbalance in its financial structure. 2. According to SICA, 1985: A unit was defined as industrial company (being a company registered for not less than seven 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 in such financial year and the financial year immediately preceding such financial year 3. Definition according to companies Act,2002:Sick industrial company means an industrial company which has Accumulated losses in any financial year which are equal to 50 percent or more of its average net worth during four year immediately preceding such financial year Failed to repay its debts within any three consecutive quarter on demand made in writing for its repayment by a creditor of such company.

Causes of industrial sickness:

The causes which are responsible for industrial sickness in Inmdia are broadly classified into: 1) Internal and 2) External causes. The following are some of the external and internal causes of industrial sickness:

Internal Causes:
1) Mismanagement:- in various functional areas of a company like finance, production, marketing and personnel resulting from wrong managerial decisions; 2) Wrong location of a unit:- for eg: high technology based projects being based in areas without skilled labor or supporting infrastructure.; 3) Overestimation of demand and wrong dividend policy; 4) Faulty planning of the production in the absence of market analysis 5) Defective Selection of plant and machineries 6) Adoption of Obsolete Technology particularly in the small sector 7) Poor Implementation of Projects which may be due to improper planning or managerial inefficiency; 8) Poor Inventory Management in respect of finished goods as well as inputs; 9) Unwarranted expansion and diversion of resources such as personal extravagances,excessive overheads, acquisition of unproductive fixed assets,etc.; 10) Failure to Modernise the productive apparatus, change the product mix and other elements of marketing mix to suit the changing environment; 11) Poor Labour Management Relationship and associated low workers' morale and low productivity, strikes, lockouts, etc arising from strained industrial relation over the issues like wages, bonus, industrial discipline etc. 12) Paucity of funds and faulty financial management 13) Acute Financial Problems due to weak equity base and lack of adequate support from banks 14) Time and cost overruns prove to be disastrous. Delay in supply of equipment, slippage in the schedule of civil works etc. Such delays cause cost escalations leading to liquidity issues and capital shortages.

15) Incompetent Entrepreneurs having lack of knowledge about costing, marketing, accounts, etc. 16) Unwarranted expansion and diversion of resources

External Causes:
1) Energy crisis:- arising out of power cuts imposed by state governments or shortage of coal and oil have been a serious problem for many industrial units. 2) Irregular Supply Of Inputs:- Inability of the units to achieve optimum capacity due to shortage of raw materials and other inputs due to its erratic supply, poor agricultural output due to natural reasons etc. 3) Infrastructural problems like transport bottlenecks; 4) Shortage of working capital / liquidity constraints; 5) Recession:- in market resulting from steep fall in quantam of demand for industrial products aggravated by credit restraints that results in unsold stocks and losses to industrial units. 6) Artificial economic constraints:- eg. Government control of product mix and prices, competition faced by the unit and excess capacity in the industry. 7) Official or Government Policy:- Frequent change in government policy in connection with industrial licensing, taxation, power tarrif, imports, exports etc. 8) Changes in Technology; 9) Change in consumer behaviour;

Types of Sick Units Industrial units Born Sick Sickness Thrust Achieved Sickness 1. Born sick These units were not financially viable from the out start and were undertaken due to lack of foresight and business acumen. Characterized by: 1. Lack of experience of the promoters, wrong selection of the project. 2. Faulty project planning 3. Paucity of funds and faulty financial management 4. Time and cost over-runs. 5. Location related problems.. 6 Technological factors 7. Wrong assessment of the market potential l8. Faulty demand forecasting.

2. Achieved Sickness These units had a viable business cycle and became sick due to mismanagement or external reasons. Characterized by: 1. Bad management 2. Unwarranted expansion and diversion of resources 3. Inability to modernize resulting in low efficiency 4. Too much competition by larger players, especially from overseas 5. Product becomes obsolete 6. Changes in Government rules and regulations 3. Sickness Thrust These units are not yet classified as sick but are rapidly losing profits and market share to competitors Characterized by: 1. Increased Competition 2. Move towards Sickness 3. Inability to modernize resulting in low efficiency 4. Other factors are similar to Achieved Sickness