Unit 2

Small and Medium Enterprises

 Introduction

Contribute significantly to the economy

They are the backbone of Industrial development
They are considered as “Engine of Growth”
Also called as Small and Medium scale businesses
Contribute most to employment generation
Contribute to national revenue through tax payment
Provide regional balance of industrial distribution
Avoid monopolistic nature of business
• The Government of India has enacted the
Micro, Small and Medium Enterprises
Development (MSMED) Act, 2006 and SME’s
are classified into 2 classes:
a. Manufacturing Enterprises
b. Service Enterprises

• The act also has defined them into micro,

small and medium enterprises as:
• Enterprises engaged in the manufacture or
production, processing or preservation of goods as
specified below:
– A micro enterprise is an enterprise where investment in
plant and machinery does not exceed Rs. 25 lakh;
– A small enterprise is an enterprise where the investment
in plant and machinery is more than Rs. 25 lakh but does
not exceed Rs. 5 crore;
– A medium enterprise is an enterprise where the
investment in plant and machinery is more than Rs.5
crore but does not exceed Rs.10 crore.

In case of the above enterprises, investment in plant and machinery is the original
cost excluding land and building and other items specified by the Ministry.
• In case of Enterprises engaged in providing or
rendering of services and whose investment in
equipment (original cost excluding land and building
and furniture, fittings and other items ) .
– A micro enterprise is an enterprise where the investment
in equipment does not exceed Rs. 10 lakh;
– A small enterprise is an enterprise where the investment
in equipment is more than Rs.10 lakh but does not
exceed Rs. 2 crore;
– A medium enterprise is an enterprise where the
investment in equipment is more than Rs. 2 crore but
does not exceed Rs. 5 crore.
 Diagrammatic representation of classification

Enterprises

Manufacturing Service
Enterprise Enterprise
Ceiling on investment Ceiling on investment
in plant and machinery in investment in equipment

Rs 25Lakhs Micro Rs 10 Lakhs

Rs 5 Crore Small Rs 2 Crore

Rs 10Crore Medium Rs 5 Crore

 History
In India, before the enactment of MSMED Act
in 2006, there was no official definition for
medium scale enterprises.
Consequently, there was no official definition
for small and medium scale enterprises
[SME's] as well as for what was commonly
called then as large and medium scale
enterprises [LME's].
• What was officially defined was a small-scale
industry (SSIs) and by definition what was not
a small-scale unit, becomes automatically a
large &medium scale enterprise or a non-SSI
unit.
• As per the latest classification followed till the
enactment of MSMED Act in 2006, a small-
scale unit was defined as one with an
investment up to Rs 5 crore in plant and
machinery, provided it is not owned by or
controlled by a subsidiary of any other
industrial undertaking.
• This condition was set to prevent big firms
from grabbing the benefits extended to small-
scale industries by setting up their subsidiaries
as small-scale undertakings.
• In addition, it was intended to discourage the
misuse of incentives by establishing more than
one SSI unit by the same person.
 Few Definitions

 Small scale industries: These are industrial undertakings having

fixed investment in plant and machinery, whether held on ownership
basis, or lease basis, or hire purchase basis, not exceeding Rs 5 Crore
 Ancillary industries:
 those which manufacture parts and components to be used by larger
industries. Eg- Companies like GE (ancillary) produce engines for the
aircraft industry.
 engaged in or proposed to engage in –
a. the manufacture of parts, components, sub-assemblies, tooling
or intermediaries.
b. the rendering of services supplying 30% of their production or
services, as the case may be, to other units for production of other
articles
 Tiny Units: It refers to undertakings having fixed investment
in plant and machinery, not exceeding Rs.25 Lakhs.
Ex: Laundry, Xerox, Maintenance of customer equipment and
machinery
 Small scale services establishments: enterprises engaged in
personal and household services in rural areas and towns, with
population not exceeding 50000, and fixed investment on plant
and machinery not exceeding Rs 25Lakh.
 Household Industries: covers skilled, Household artisans, who
can work in their own houses which requires less than 300Sqft,
1Kw Power, less than 5 workers, and no pollution is caused.
Ex: Handicrafts, Toys, Plastic and paper products
 Characteristics of Small Scale Industries

a. Ownership
b. Management and control
c. Area of operation
d. Technology
e. Gestation period
f. Flexibility
g. Resources
h. Dispersal of units
i. One-man show:
a. Ownership: It can be as sole proprietorship or with few
individuals as partnership.
b. Management and control: in case of sole proprietorship,
decision and management will be by a single individual.
In case of partnership management and decisions are
taken by active partners, rest all will be sleeping partners.
c. Area of operation: It is generally localised catering to the
local or regional demand. The overall resources at the
disposal of the small scale units are limited and as a
result of this, it is forced to confine its activities to the
local geographical area.
d. Technology: They are fairly labour intensive, with
comparatively smaller capital investment, than the larger units.
Hence suitable where capital is scarce and there is abundant
supply of labour. Hence end up adapting local technology
e. Gestation period: It is the time between the investment and the
start of ROI. It is less in small units when compared to large
units.
f. Flexibility: As compared to large scale units, these are more
susceptible to changes and highly reactive and responsive to
socio-economic conditions. Hence They are more flexible to
adopt changes like new method of production, introduction of
new products etc
G Resources: Small scale units use local or indigenous
resources and as such can be located anywhere subject to
availability of these resources like labour and raw materials.
H Dispersal of units: Development of small scale units in
rural and backward areas promote more regional
development and can prevent the influx of job seekers from
rural areas to cities.
I One-man show: A small-scale unit is generally a
one-man show. It is mostly set up by individuals.
Even some small units are run by partnership firm
or company, the activities are mainly carried out
by one of the partners or directors. Therefore, they
provide an outlet for expression of the
entrepreneurial spirit. As they are their own boss,
the decision making process is fast and at times
more innovative.
The objectives of small scale industries are:
1.To create more employment opportunities with less investment.
2.To remove economic backwardness of rural and less developed
regions of the economy.
3.To reduce regional imbalances.
4.To mobilise and ensure optimum utilisation of unexploited
resources of the country.
5.To improve standard of living of people.
6.To ensure equitable distribution of income and wealth.
7.To solve unemployment problem.
8.To attain self-reliance.
9.To adopt latest technology aimed at producing better quality
products at lower costs.
Product Range for Small Scale industries
Food Products
Chemical & Chemical
Products
Basic Metal Industries
Metal Products
Electrical Machinery & Parts
Rubber & Plastic Products
Machinery & Parts Except
Electrical goods
Hosiery & Garments - Wood
Products
Non-metallic Mineral
Products
Paper Products & Printing
Transport Equipments &
Parts
Leather & Leather Products
Miscellaneous
Manufacturing Industries
Other Services & Products
Beverages, Tobacco &
Tobacco Products 16. Repair
Services
Cotton Textiles
Wool, Silk, Synthetic Fiber
Textiles
Jute, Hemp and Mesta
Textiles
Other Services
• Small Scale sector has also emerged as a
major supplier of mass consumption items
like………
1. Leather And Leather Goods
2. Plastic And Rubber Goods
3. Ready-Made Garments
4. Hosiery Goods, Sheet Metal Goods
5. Stationery Items - Soap And Detergents
6. Domestic Utensils
7. Toothpaste And Toothpowder
8. Safety Matches
9. Preserved Foods And Vegetables
10. Wooden And Steel Furniture
11. Paints And varnishes etc.,
• Among the sophisticated items mention may
also be made of……
1. Television sets
2. Calculators
3. Microwave Components
4. Plastic Film Capacitors
5. Carbon Film Registers
6. Electro Medical Equipments
7. Electronic Teaching Aids
8. Digital Measuring Equipments
9. Air-Conditioning Equipments
10. Optical Lenses
11. Drugs And Pharmaceuticals
12. Electric Motors
13. Pesticide Formulators
14. Photographic Sensitised Paper
15. Razor Blades
16. Collapsible Tubes,Etc.
The opportunities in the small-scale sector
are enormous due to the following factors
• Less Capital Intensive
• Extensive Promotion & Support by Government
• Reservation for Exclusive Manufacture by small scale sector
• Funding - Finance & Subsidies
• Machinery Procurement
• Raw Material Procurement
• Manpower Training
• Technical & Managerial skills
• Tooling & Testing support
• Reservation for Exclusive Purchase by Government
• Export Promotion
• Growth in demand in the domestic market size due to
overall economic growth
• Increasing Export Potential for Indian products
• Growth in Requirements for ancillary units due to the
increase in number of units in the large scale sector. Small
industry sector has performed exceedingly well and
enabled our country to achieve a wide measure of
industrial growth and diversification
 Problems faced by SME
• Small-scale industries in India could not
progress satisfactorily due to various problems
that they are confronted with while running
enterprises. In spite of having huge
potentialities, the major problems, small
industries face are given below.
 Problem of skilled manpower:
• The success of a small enterprise revolves
around the entrepreneur and its employees,
provided the employees are skilled and
efficient. Because inefficient human factor and
unskilled manpower create innumerable
problems for the survival of small industries.
Non-availability of adequate skilled manpower
in the rural sector poses problem to small-
scale industries.
 Inadequate credit assistance:
• Adequate and timely supply of credit facilities
is an important problem faced by small-scale
industries. This is partly due to scarcity of
capital and partly due to weak
creditworthiness of the small units in the
country.
 Irregular supply of raw material:
• Small units face severe problems in procuring the
raw materials whether they use locally available raw
materials or imported raw materials. The problems
arise due to faulty and irregular supply of raw
materials. Non-availability of sufficient quantity of
raw materials, sometimes poor quality of raw
materials, increased cost of raw materials, foreign
exchange crisis and above all lack of knowledge of
entrepreneurs regarding government policy are
other few hindrances for small-scale sector.
 Absence of organised marketing:
• Another important problem faced by small-
scale units is the absence of organised
marketing system. In the absence of organised
marketing, their products are compared
unfavourably with the quality of the product
of large- scale units. They also fail to get
adequate information about consumer's
choice, taste and preferences of the type of
product. The above problems do not allow
them to stay in the market.
Lack of machinery and equipment:
• Small-scale units are striving hard to employ
modern machineries and equipment in their
process of production in order to compete
with large industries. Most of the small units
employ outdated and traditional technology
and equipment. Lack of appropriate
technology and equipment create a major
stumbling block for the growth of small-scale
industries.
 Absence of adequate
infrastructure:
• Indian economy is characterized by inadequate
infrastructure which is a major problems for small units to
grow. Most of the small units and industrial estates found in
towns and cities are having one or more problems like lack
of of power supply, water and drainage problem, poor
roads, raw materials and marketing problem.
• Thus absence of adequate infrastructure adversely affect
the quality, quantity and production schedule of the
enterprises which ultimately results in under-utilization of
capacity.
Competition from large-scale units
and imported articles:
• Small-scale units find it very difficult to
compete with the product of large-scale units
and imported articles which are comparatively
very cheap and of better quality than small
units product.
 Lack of IT Support
• IT personnel are in high demand and are often
attracted to bigger companies and MNCs.  It is
very difficult for SMEs to attract good IT
personnel.  It is even more difficult to retain
them.  Moreover, good IT personnel are
expensive and may not be affordable by most
SMEs.
 Lack of IT Literacy
• Many of the employees in SMEs started from
the ground up after working with the company
for many years.  Some of them are often
holding supervisory and managerial positions.
These employees may not be IT literate and
often have high resistance to the changes in
the working process that they are comfortable
with after many years.
 Lack of Formal Procedure and
Discipline
• Most SMEs do not have formal procedure or
often these are not documented.  Furthermore,
there is a tendency for these procedures to
change frequently.  This makes it difficult for
third party and newcomer to understand the
existing business practices and match them with
the IT process.
 Uneven IT Awareness and
Management Skill
• As company grows, new managers are often
introduced into the company.  There will also
be old managers who are promoted from the
rank and file.  Some of these managers may
not been trained in the leadership and
management skill.  These uneven skill among
the managers often causes conflicts during the
implementation.
 Lack of Financial Resources
• As a SME/SMI, financial resources are often
limited.  This often forces company to select a
financial solution, which appear to be cheap
initially.  However, the hidden costs will start
to emerge during implementation.  This
sometime causes the project to be abandoned
or sometime sends the company into further
financial crisis.
 Lack of Human Resources
• Implementations of some bigger scale IT project
especially those that involve business process
across different departments or require large
amount of initial data entries require human
resource during the implementation.  Some SMEs
are often in the stage of frequent fire fighting and
shortage of manpower. 
 Lack of Experience of Using Consultants
• A good consultant often save time and effort, and
help to prevent pitfalls during the IT projects. 
However, most SMEs are lacked of experience in
working with consultants.  The lack of knowledge in
the field of IT makes them difficult in identifying
good consultant for the projects.  They often feel
that the consultant costs is too high and they can
handle it with their own staff.  If the company has
no staff that are experience and knowledgeable in t
he IT project, avoiding external help often costs
more to the company eventually.
 Scarcity of Resources
One of the most important challenge faced by SMEs
in India is Scarcity of Resources such as Raw
material and labor. Due to Corruption the
government invests the public resources in 
uneconomic high profile projects rather than
necessary projects such as infrastructure
development or development of rural India. Which
hinders the growth process and overall
development of SMEs located in such areas.
 Lack of FDI’s
Due to high influence of Multi-national corporation
over the Micro sectors and SMEs in India the foreign
investors hesitate to invest in projects of
SMEs . Lack of FDI in the Indian economy can be
seen by the fact that though the FDI rules have
been eased by the Indian Government in the recent
past but we are yet to see its benefits for India in
long term. Thus it would be more difficult for the
SMEs and budding Entrepreneurs to get loans and
this may hamper their development.
 Lack of Technology
One of the crucial factor the decides the
success or failure of an Enterprise is the use of
Technology for the production. The best
technology helps the enterprise to reduce it’s
cost of production, improves productivity and
brings efficiency, but SMEs fails to cope up
with the latest technology due to lack of
finance in India.
 Idle Capacity:
• There is under utilisation of installed capacity
to the extent of 40 to 50 percent in case of
small scale industries. Various causes of this
under-utilisation are shortage of raw material
problem associated with funds and even
availability of power.
 Bad Economic Environment
Another external factor that hampers the
growth of a small business is that corruption
creates a bad economic environment in the
country. A lot of money is spent on corruption
activities and that money drains out to the
economy and thus leaves the country to face
shortage of cash flow. All such factors led to
the poor growth of SMEs sector in India.
 Lack of Marketing Assistance
When it comes to marketing of products or
services internationally, any small or medium
company is always hit by its scarcity of
budgets, which in turn limits its growth. A B2B
( business to business) market is a platform
where sellers can list their businesses free of
cost and use the power of internet. But due to
lack of technology and knowledge, the
workforce fails to explore the benefits of
internet in today’s era. All this leads to slow
growth of SMEs in India.
 Other problems:
• Besides the above problems, small-scale units
have been of constrained by a number of
other problems also. They include poor
project planning, managerial inadequacies, old
and orthodox designs, high degree of
obsolescence and huge number of bogus
concerns. Due to all these problems the
development of small-scale industries could
not reach a prestigious stage.
Suggested Measures to Promote
Small Scale Industries in India
• Small Scale Industries have contributed a lot
for the development of the economy of India.
Still SSI face problems due to the nature and
size of their business. Some of the measures
that can be taken by government and NGOs to
boost the performance are as follows:
1. Government should ensure that adequate
financial assistance is provided to SSls through
banks and financial institutions. The rate of
interest on loans should be low. Financial
assistance must be provided to SSI through
unsecured loans or after obtaining minimum
security.
2. Insurance coverage must be extended to new
and existing small scale industries.
3. The gap that exists between consumers and
small business must be bridged through
effective marketing. Lot of industrial fairs,
exhibitions must be organized by the
government to encourage the sale of SSI
products.
4. The infrastructural facilities must be improved
and measures must be taken to enhance the
supply of water, electricity to backward and
rural areas.
5. Technological support must be provided to SSI
to import machinery at lower cost.
6. Many industrial estates must be established
by the government.
7. The informal money market should be
regulated to avoid exploitation by money
lenders on small scale industrialists.
8. Training must be provided to entrepreneurs in
technological, managerial, financial and
marketing areas.
9. Awareness campaigns must be carried out in
full swing to encourage youngsters to become
first generation entrepreneurs.
10. The sick industries must be rejuvenated
instead of liquidation.
11. The licensing procedure must be simple and
at ease.
12. Fair Incentives and subsides must be given to
SSI units and an awareness must be made
about the incentives available to new
entrepreneurs
13. Export promotion schemes must be devised
in such a way that encourages SSI to export
their goods.
14. Equitable Allocation of Raw Materials,
Imported Components and Equipment:The
small scale industrial units should be given
adequate degree of priority in the allocation
pattern of essential, but scarce, raw materials,
imported components and equipment.
• 15. Improvement in the Methods and
Techniques of Production:
• The small scale industrial units should be
encouraged to replace their outmoded
equipment with that incorporating an up-to-
date technology, and facilities and incentives
should be provided wherever required.
Steps taken by the Government to
solve the problems of MSMEs
The government has undertaken numerous
measures to obtain a solution to the problems
faced by Micro, Small and Medium enterprises
(MSME) and permit them to play an efficient
and capable role in the country’s economy.
These measures may be generally classified as
the following:
• Various measures undertaken by the
Government can be broadly classified into 3
categories
• Protection Measures: These include measures that are
designed to protect small scale industries from the
competition of existing large firms. Ex: Reservation of
products, subsidies and incentives, soft loans, SEZs etc..,
• Promotional Measures: These include measures which
have been undertaken for the promotion of the growth
related to the small scale sector in the country such as
programs, guidelines, procurement of goods and services
and government grants.
• Institutional Measures: These are inclusive of measures
which have been undertaken by the government by setting
up of several institutions or related agencies for the
provision of liberal and multifaceted assistance to the small
scale industry sector.
Protection Measures:
• In order to make the Credit Guarantee Scheme more
beneficial the following modifications have been made
namely:
• Increasing loan eligibility limit from the amount of Rs. 25
lakh to Rs. 50 lakh.
• Raising the extent of guarantee cover from 75 % to 80 % for
the following categories:
– Micro enterprises for loans up to the limit of Rs. 5 lakh
– Medium and Small Scale Enterprises that are operated or owned
by women
– All loans availed in the North Eastern Region of India
• Reduction of the one-time guarantee fee from 1.5 % to 0.75
% for all loans availed in the North-Eastern Region of India.
Promotional Measures
– Industrial extension services
– Institutional support with reference to credit facilities
– Providing developed sites for the construction of sheds
– Providing training facilities
– Supply of machinery on the basis of hire-purchase terms
– Enabling Assistance for domestic marketing and exports
– Offering special incentives for creating enterprises in
backward areas and so on
– Offering technical consultancy and financial assistance
for the purpose of technological enhancement
Credit Facilities :-
The government should provide the credit to
small and cottage industries at lower rate of
interest. Further commercial banks are also
providing loan to develops the industries.
• Industrial Estates :-
The government has set up the number of
industrial estates in the different cities. These
areas have been provided various facilities
like, roads, banking, and transport facilities to
encourage the small scale industries.
• Testing Laboratories :-
The government has established the testing
laboratories to maintain the prescribed
standard of cottage industries product.
• Supply of Designs :-
The government also provides the new
models and designed to producers to improve
the qualify of cottage industry.
• Publicity :-
The government has set up the display centers
and show room,s inside and outside the
country to increase the sale of cottage
industry product.
• Facility of Raw Material :-
The government imports the raw material for
the cottage industries from abroad and
provides them at lower price to encourage
them.
• Purchase of Cottage Industry Product :-
The government also purchases finished
products from them and sells it at show room.
Govt display centers in side and out side the
country are creating the demand.
• Protection Against Foreign Competitions :-
The government has also provided protection
to home industry by imposing heavy duties on
the imports. Still there is a need of further
protection. Smuggling should be also
controlled.
• Establishment of Training Institutions :-
The government has set up various
institutions like industrial, vocational,
commercial and polytechnic institutions to
provide the qualified workers to the cottage
and small scale industries.
• Carpet Centers :-
For the training of weavers the small
corporation have set up carpet training
development centers. These are working very
usefully.
• Handicraft Centers :-
Handicrafts development centers have been
set up to promote the handicrafts.
• Advisory Services :-
The small scale industries advisory services
has been set up in each province to provide
guidance to the new comers in small scale
industry.
 Institutional measures
(Support Services)
• For the purpose of protecting, supporting and
promoting small enterprises and also to aid them to
become self-supporting.
• While the majority of the institutional support services and
a few incentives are provided by the Central Government,
others are instituted by the state governments in various
degrees to encourage investments and support small
industries in varying degrees to attract investments and
support small industries with an intention to improve
industrial production and to create employment
opportunities in the respective States.
(i) National Bank for Agriculture and Rural
Development (NABARD) It was set up in 1982,
to promote integrated rural development.
Apart from agriculture, it supports small
industries, cottage and village industries and
rural artisans. It provides credit and offers
counselling and consultancy services and
organises training and development
programmes for rural entrepreneurs.
(ii) The Rural Small Business Development
Centre (RSBDC) It was set up by the world
association for small and medium enterprises
and is sponsored by NABARD. It works for the
benefit of socially and economically
disadvantaged individuals and groups. It aims
at providing management and technical
support to current and prospective micro and
small entrepreneurs in rural areas.
(iii) National Small Industries Corporation (NSIC) It
was set up in 1955 with a view to promote, aid and
foster the growth of small business units in the
Country.
 Functions of NSIC include
(a) Supply of machines on easy hire-purchase terms.
(b) Procure, supply and distribute raw materials.
(c) Export the products of small business units and develop
export-worthiness.
(d) Mentoring and advisory services.
(e) Serve as technology business incubators.
(f) Creating awareness on technological upgradation.
(g) Developing software technology parks arid technology
transfer centres.
Scheme of‘performance and credit rating’ of small
businesses is implemented through NSIC to ensure that
they score higher rating for their credit requirements as and
when they approach the financial institutions for their
working capital and investment requirements
(iv) Small Industries Development Bank of India
(SIDBI) It was set up as an apex bank to
provide direct/indirect financial assistance
under different schemes, to meet credit needs
of small business organisations and to
coordinate the functions of other institutions
in similar activities.
(v) The National Commission for Enterprises in, the
Unorganised Sector (NCEUS) It was constituted in
September, 2004, with the objectives of
recommending measures considered necessary for
improving the productivity of small enterprises in
the informal sector and to enhance the
competitiveness of the sector in the emerging
global environment by developing linkages of the
sector with other institutions in the areas of credit,
raw materials, infrastructure, technology
upgradation, marketing, etc.
(vi) Rural and Women Entrepreneurship
Development (RWED) This programme aims at
promoting a conducive business environment
and at building institutional and human
capacities that will encourage and support the
entrepreneurial initiatives of rural people and
women by providing training and advisory
services.
(vii) Scheme of Fund for Regeneration of
Traditional Industries (SFURTI) The Central
Government set up this fund to make the
traditional industries more productive and
competitive and to facilitate their sustainable
development.
The main objectives of SFURTI are to develop
clusters of traditional industries in various
parts of the country; build innovative and
traditional skills, improve technologies and
encourage public private partnerships,
develop market intelligence, etc.
(viii) The District Industries Centres (DICs)
District Industries Centre is the institution at
the district level which provides all the
services and support facilities to the
entrepreneurs for setting up small and village
industries including identification of suitable
schemes, preparation of feasibility reports,
arranging for credit, machinery and
equipment, provision of raw materials and
other extension services. This was launched
on 1st May, 1978.
Sickness in SMEs
• A healthy unit
– earns a reasonable return on capital employed
– builds up reserves after providing reasonable
depreciation.

• sick unit is the one which is not healthy

• Sickness is a gradual process(5 to 7 years)
• Sickness corrodes the health of a unit beyond
cure.
• Sickness starts with downturn in the industry
whose continuation leads to setting in 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 year of its
operation and in the judgment of the
financing bank is likely to incur cash loss for
the current year and also in the following
year.”
• According to Companies (Second Amendment) Act, 2002
"'Sick Industrial Company' means an industrial
company which has
i) The Accumulated losses in any financial year equal
to 50 per cent or more of its average net worth
during four years immediately preceding such
financial year; or
ii) Failed to repay its debts within any three
consecutive quarters on demand made in writing
for its repayment by a creditor or creditors of such
company."
• As per the extant guidelines, a Micro or Small
Enterprise (as defined in the MSMED Act
2006) may be said to have become Sick, if-      
– Any of the borrower account of the enterprise
remains NPA for three months or more.       
– There is erosion in the net worth due to
accumulated losses to the extent of 50% of its net
worth during the previous accounting year. 
• Industrial sickness creates various socio-eco­
nomic problems.
– When an industrial unit falls sick those who
depend on it have to face an uncertain future.
They fear loss of jobs. Even if they do not lose jobs
they do not get their wages and compensation in
time and are, thus, forced to live in extreme
hardship.
• sick units are
– nursed back to health through mergers,
amalgamations, takeovers, purchase of assets, or
outright nationalization. When the-problem
becomes really alarming or unmanageable,
– permitted to die their natural death.
 Causes of sickness
• The factors leading to sickness can be due to
reasons of finance, technical issues,
mismanagement, non-availability of raw
materials, power or natural calamities or
disasters such, as fire or earth­quake or a
combination of such factors.
 External v/s. Internal Causes
• External causes are those which are beyond
the control of its management and seen to be
rela­tively more important than internal
causes.
• Internal Causes are internal to the firm and
within the management’s control
External Causes
a) Personnel Constraint: non availability of skilled labour,
demanding labour, wages disparity in similar industry, and
general labour concentrated in particular area, etc..,
b) Marketing Constraints: liberal licensing policies which
attract big players, restrain of purchase by bulk purchasers,
global market dynamics, market recession, Market
obsolescence, etc…,
c) Production Constraints: shortage of raw material, shortage
of power, fuel and high fuel prices, import-export restrictions on
components etc..,
d) Finance Constraints: loan eligibility requirements, delay in
disbursement of loan by govt., unfavorable/unplanned
investments, fear of nationalization of products/services.
e)credit constraints: Credit squeeze (unexpected reduction in the
availability of loans or tightening of the conditions required to
obtain loan) initiated by the government policies.
f) general constraints:
• Delay in
-land acquisition
-building construction
-obtaining financial assistance from financial institutions
-supply of machinery by the manufacturers
-sanctioning licenses, permits, excessive tax policies by
govt. etc.
• Lack of demand for products or shift of demand to products
of rival firms
• Changes in Government policy relating to movement of
goods from one place to another within the country
Internal causes
a) Finance constraints: poor utilization of assets, inefficient working
capital management, absence of costing & pricing, absence of
planning and budgeting and inappropriate utilization or diversion of
funds etc..,
b) Production Constraints: wrong selection of production site, wrong
selection of plant & machinery, bad maintenance of Plant &
Machinery, lack of quality control, lack of standard research &
development etc..,
c) Marketing Constraints : wrong demand forecasting, selection of
inappropriate product mix, absence of product planning,
wrong market research methods, and bad sales promotions.
d) Personnel Constraints: bad wages and salary administration, bad
labour relations, lack of good HR policies leading dissatisfaction
among the employees etc..,.
e) Corporate Constraints: improper corporate planning, lack of integrity
in top management, lack of coordination and control etc..,
e) General Constraints :
• Problems related to recruitment of technical and managerial staff
• Unsatisfactory performance by collaborators—financial and technical
• Lack of experience of the promoters in a specific business
• Differences in opinions of people associated with the promotion and
management of the enterprise
• Mechanical defects and breakdown
• Inability to purchase raw materials at an economic price and at the
right time
 Suggested Remedies
• technical help,
• professional counselling
• Managerial skills
• sufficient, timely and soft finance from bankers
• assistance in related matters of insurance
• a large number of sick units may have to be
permitted to close/liquidate;
• a fewer number of sick units may be picked up
for revival/rehabilitation and
• a larger number of weak units may be
combined together to prevent sickness.
Remedial measures to overcome
Sickness
 1. Identifying sickness at initial
stage
• the identification and detection of the
sickness at the initial stage is the first and
foremost measure to detect and reduce
industrial sickness
 2. Financial assistance
• Lending financial bankers need to relax their
lengthy process and other norms for
extending credit to the SSIs.
– grant credit without delay
– Increasing Working capital limit
– Reduced rate of interest
 3. Improving Infrastructure
• by improving the roadways, waterways,
establishing telecommunication systems.
• by setting up industrial estates. Common
testing centres
 4. Technology Up-gradation
• Funds may be provided by the financial
institutions for adoption of advanced
technology.
• training may be provided for use of the latest
technology to overcome technological
problems.
• This helps to overcome technological
obsolescence.
 5. Marketing assistance
• Government and Non Government
Organizations (N.G.Os) and other promotional
agencies can come forward for marketing the
goods produced by the SSI sector
 6. Liquidation
• It is better to wind up the business when there
is no possibility to revive the unit.
 7. Government Interventions
• Periodic review of financial statements can
help to identify and prevent sickness at initial
stage.
 8. Training
• After which an entrepreneur gets educated
and will have a proper knowledge, skill and
experience about internal and external
environment of business to compete with
large scale industries and multinational
companies.
 9. Rehabilitation
• Board for Industrial and Financial
Reconstruction (BIFR) has been set up in
January 1987 for determining the preventive,
remedial and other measures required to be
taken in respect of sick industrial company
and for expeditious enforcement of
rehabilitation schemes.
• Potentially viable sick units should be dealt
well for the purpose of rehabilitation
• The main objective of BIFR is to determine
sickness and expedite the revival of potentially
viable units or closure of unviable units. As it
was expected that
– by revival, idle investments in sick units will
become productive
– by closure, the locked up investments in unviable
units would get released for productive use
elsewhere.
 It is to be understood that…
• When a decision is taken to rehabilitate a sick
unit, it should be finalized quickly and
implemented speedily.
• At the same time, the rehabilitation
programmes need to be implemented in full,
as a piece-meal implementation often
jeopardizes the efforts to rehabilitate the unit.
• The MSM (micro, small and medium (MSM)
industries)policy has provided a separate package for
rehabilitation of such industries in India, which proposes to
set up a rehabilitation fund for sick industries.
• Funds will be infused into the sick industry committee
based on the recommendation of a State-Level
Rehabilitation Committee (SLRC).
• The rehabilitation fund, among other things, will be used
for meeting 75 percent of the cost of the cause that made
the industry sick, and to sanction an interest subsidy of 4
per cent for two years on rehabilitation/bridge loans up to
Rs.15 lakh to the sick MSM industries.
The rehabilitation programme involves
• Change of Management
• Development of a suitable management information
system
• Settlement with the creditors for payment of their dues in a
phased manner.
• Determination of the sources of additional funds needed to
refinance.
• Modernization of plant and equipment or expansion of an
existing programme or even diversification of the products
being manufactured.
• Concession or relief or assistance allowed by the state level
corporation, financial institutions and Central Government.