KOMAL K

SIREESHA P
 SICK INDUSTRY
Sickness generally means:

 FINANCIAL NON-VIABILITY

 Elements of Financial viability

Profitability
Liquidity
Solvency

Therefore a sick unit is :

"one which fails to generate internal surplus on a continuing basis and
depends for its survival upon frequent infusion of external funds".
 Industrial sickness
 According to Sick industrial companies act (SICA)

An industrial unit is regarded as potentially sick

or weak unit
If at the end of any financial year, it has
accumulated losses equal to or exceeding 50 per
cent of its average net worth in the immediately
preceding four financial years and has failed to
repay debts to its creditor(s) in three consecutive
quarters on demand made in writing for such
repayment.
 Industrial sickness
According to RBI :
 A sick unit is one which incurs cash losses for 1 year & which , in
the judgment of the bank , is likely to incur losses for the current
year as well as the following year, & which has imbalances in its
financial structure, like worsening debt equity ratio.
OR
 If it has
(a) incurred cash losses in the previous year and is likely to incur
cash loss in the current year and has an erosion of 50% or more of
its net worth; and/or
(b) made defaults in payment of four consecutive quarterly
instalments of interest or two half-yearly instalments of principal
on the term loans and there are persistent irregularities in the
operation of its credit limits with the bank.
 CAUSES OF SICKNESS
 Internal causes
Management
Production / technical
Marketing
Finance
Personnel

 External causes
Competitive change
Technological change
Market constraints
Economic change
Government constrains
 INTERNAL CAUSES
Management errors
 Lack of proper education, training, experience and
business outlook of the Sponsors/Entrepreneurs
leading to poor Entrepreneurial skills
 Overleverage
 Overexpansion
 Over diversification
 Over emphasis on sales
 Inadequate control systems
 Over dependence
 Poor planning
 INTERNAL CAUSES
Production / technical errors
 Wrong choice of technology
 Lack of raw material
 Improper utilization of production capacity
 Imbalanced and Defective Machinery
 Poor Raw-material Planning
 Inadequate Quality Control
 Poor location

Marketing errors
 Lack of Market Planning
 Inadequate Market Survey
 Defective Pricing
 INTERNAL CAUSES
Financial causes
 Weak debt equity base
 Inadequate working capital
 Absence of planning and budgeting
 Inappropriate utilization of funds
 Lack of credit facility

Personnel causes
 Bad labour relations
 lack of behavioral approach towards employees and
workers
 Lack of integration at various levels of management
 EXTRENAL CAUSES
Competitive change
 Low cost production
 New entrants
 Innovative products and attractive services

Technological change
 Advancement in R&D

Market constraints
 Market sensitivity
 Poor distribution network
 Imbalance between production & marketing
 Lack of specific market segmentation
 changes in global marketing scenario
 EXTERNAL CAUSES
Economic changes & Government constraints
 Frequent policy changes w.r.t
Excise duties
Custom duties
Industrial licensing policies
 Exchange Rate Fluctuation
 Lack of Co-ordination between various ministries and Govt.
Departments

Banks and financial institution’s policies

 High interest rates on bank loan
 Delay in disbursement of loan by govt
 EFFECTS OF SICKNESS
 It locks up necessary resources and funds so profitability of banks
and financial institutions declines

 It leads to loss of production and productivity in the economy

 It effects industrial atmosphere and leads to worker-management

disputes ,strikes...

 large scale unemployment

 Entrepreneurship declines

 Investors confidence declines

 INDICATORS OF SICKNESS
 Continuous reduction in turnover
 Piling up of inventory
 profit fluctuations, and fall in profits followed by
contraction in the share market
 Short term borrowings at high interest rate
 Default in the payment of interest borrowings
 Default in payment of term loans
 Low capacity utilization
 Larger and longer outstanding in the bill accounts;
 Non submission of periodical financial data /stock
statement etc. in time
 Rapid turn over of key personnel
 PREDICTION OF SICKNESS
Univariate Analysis :
 Prediction of sickness is done on the basis of single financial ratio.
Beaver conducted three types of analysis to determine the
predictive power of financial ratios:
 A comparison of mean values,
 A dichotomous classification analysis, and
 An analysis for cash flows to debt ratios

Multivariate Analysis :
 Commonly used in predicting business failure or sickness, is the
technique of multiple discriminant analysis.
 This is a statistical technique which helps in classifying an
observation into one of the several pre-specified groups on the
basis of certain characteristics of the observation.
 SICK INDUSTRIES REVIVAL
Role of BIFR:
 Timely detection of sick & potentially sick companies.
 Speedy determination by a group of experts
 Enforcement of revival measures
Reporting to the BIFR
 Board of Directors of a sick industrial company is required to report the sickness to
BIFR for determination of the remedial measures with respect to their company.
This should be done within sixty days from the date of finalisation of the duly
audited accounts of the company for the financial year at the end of which the
company had become sick.

Enquiry by BIFR
Revival package
 Additional financial assistance
 Postponement of recovery of loans lend by the banks
 Lease or sale of assets
 Reduction in sales tax
THANK YOU