Sickness in Small Scale Industries

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Contents

Meaning of Industrial Sickness

Process of industrial sickness

Signals and symptoms of Industrial Sickness

Causes

Consequences

Preventive measures measures

Different roles

Case studies

Industrial Sickness

Accumulated losses equal to or exceeding 50% of its net worth in the immediately preceding five accounting years.

A current debt equity ratio of less than 1:1.

Suffers a cash loss in the immediately preceding accounting year.

Process of Industrial Sickness

Process of Industrial Sickness

Normal Units Functional areas, viz., production, marketing, finance and personnel are normal and efficient. Generating profits, current ratio also is more than one.

Tending toward sickness Net worth is positive, debt equity ratio is satisfactory, initial aberration in some of the functional areas mentioned above. Decline in profit during last year and losses anticipated in current year.

Incipient sickness Deterioration in the above functional areas continues, cash losses incurred in last year are expected in current year also. Deterioration anticipated in current year. Although current ratio is more than one during last year.

Sickness Deterioration anticipated in debt- equity ratio during current year. Unit’s functional areas have become inefficient, cash losses incurred in last year.

Signals of Industrial Sickness

Decline in capacity utilization

Shortages of liquid funds to meet short-term financial obligation

Inventories to excessive quantities

Non submission of data to banks and financial institutions

Irregularity in maintaining bank accounts

Frequent breakdowns in plants and equipments

Decline in quantity of product manufactured or service rendered

Delay or default in the payment of statutory dues such as provident fund, sales tax, excise duty, employees, etc.

Decline in technical deficiency

Frequent turnover of personnel in the industry

Symptoms of industrial sickness

Persisting shortage of cash

Deteriorating financial ratios

Widespread use of creative accounting

Continuous tumble in the prices of the shares

Frequent request to banks and financial institutions for loans

Delay and default in the payment of statutory dues

Delay in audit of annual accounts

Morale degradation of employees and desperation among the top and middle management level

Causes of Industrial Sickness

External Causes

Internal Causes

Analysis: Year-wise SSI-sick units in Orissa

Year upto No. of SSI Units Set-up

No. of SSI-sick Units

Percentage to the total

1995-96 49,586 1,458 2.94

1996-97 52,687 1,464 2.77

1997-98 55,873 1,489 2.66

1998-99 59,057 1,493 2.52

1999-2000 62,530 1,508 2.41

2000-01 66,206 1,519 2.29

2001-02 70,125 1,524 2.17

2002-03 74,133 1,527 2.05

2003-04 78,564 1,535 1.95

Analysis: SSI-Sick Units in South Orissa of 2003-04

Sl. District No. of SSI units set up

No. of Sick Units

No. of Closed Units

No. of revived units

1 Ganjam 7511 2088 112 21

2 Gajapati 355 71 18 03

3 Koraput 4025 934 41 10

4 Malkangiri 126 22 04 -

5 Nowaranpur 302 51 - -

6 Rayagada 1297 231 10 02

7 Bondh 166 12 16 04

8 Kandhamal 1850 317 12 02

Total 15632 3726 243 42

Consequences of industrial sickness

Huge financial losses to the banks and the financial institutions

Loss to employment opportunities

Emergence of industrial unrest

Adverse effect on prospective investors and entrepreneurs

Wastage of scarce resources

Loss of revenue to the Government

Preventive measures

In preventing the sickness, therefore, the role of the following agencies has been identified with respective distinction

Term Lending Institutions

Commercial Banks

Entrepreneur

Government

These agencies can effectively stem the sickness if they make use of signals and symptoms that are generated by the industrial unit in its working and by using information and reporting system of important key parameters of the industrial enterprise.

Role of Term Lending Institutions

Appraisal of Management

Proper evaluation of the management of the project.

Banning Industries Not Having Scope

Timely help by identifying those industries or industrial products, where sickness seems to be emerging

Machinery & Equipment

Ensure that the second-hand equipment would have a reasonable long life after reconditioning.

Satisfactory Implementation

Ensure that all avoidable delays at the appraisal stage and during the disbursement of the sanctioned assistance are eschewed scrupulously

Role of Commercial Banks Careful Proper Appraisal

Ensures not only its success but the banker's interest is also safeguarded.

Timely disbursement

To ensure that working capital finance should be available in time to avoid overruns in project cost.

Warning Signals

A good look at the ledger account of a customer (bank's) by an experienced banker

Market Intelligence

An innocuous visit to the unit by the banker might help in crystallizing the picture further.

The Role of the Entrepreneur

Management Board

The industry should have a board with competent persons from all disciplines needed to run the unit successfully, appoint a dynamic chief executive to implement the policies formulated by the board and ensure a proper second line of defense by appointing professional go-getters.

Partners in Enterprise

The Role of the Government

Sudden changes in industrial policy

May discourage new investment but also upsets further plans causing sickness in the established units.

Resistance to change

Without a change in management, the unit would soon become chronically sick.

Power to change

Term lenders may be authorized to appoint in units suffering from incipient sickness whole time financial, technical and marketing directors.

Sick Industrial Company Act

Timely detection of sick and potentially sick companies

Speedy determination by a body of experts of the preventive, ameliorative, remedial and other measures which need to be taken with respect to such companies.

The expeditious enforcement of the measures so determined and for all matters connected therewith or incidental thereto.

Mitsubishi Chemicals Corporation 

Mitsubishi Chemical Corporation, set up a PTA manufacturing facility in Haldia in 1997 in partnership with Bengal govt

MCC PTA India had initial investment of `1,475 crore and was Japan’s largest FDI in India. Mitsubishi has so far invested `3600cr

In Feb, Mamata govt cleared a `3,400cr capital incentive, equal to almost 10 years’ state tax holiday

"Losses have increased in the last two months mainly due to volatility in Paraxylene prices. This has put more pressure on its profitability," said an official.

 

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