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Financial
units

management

in

sick

Sickness in the industrial units is not a new phenomenon as is evident in


the developing countries. Even in the industrially advanced countries of
the world, varying degrees of sickness are found to occur.
An industrial unit may face a number of odds during its implementation
and operation stage because of a number of factors in the environment
internal and external.
If the problems perpetuate & does not permit the unit to pursue the
normal course of operations leading to reasonable utilization of capacity,
generation of surplus, debt servicing, etc, it can be presumed that some
kind of sickness has engulfed the unit and if this trend grows unchecked,
it would adversely affect production and employment in the country
besides other socio-economic repercussions.

Definition:
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.
As per the definition by the Sick Industrial Companies Act, 1985. A sick
industrial unit is an industrial company (being a company registered for
not less than seven years) which has at the end of any financial year
accumulated losses in that financial year and in the financial year
immediately preceding it.

Sick Companies Act


The most important piece of legislation dealing with industrial sickness was
the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA). It applies
to industrial undertakings both in the public and private sectors. SICA pertains
to the industries specified in the First Schedule to the Industries ( Development
and Regulation) Act, 1951, (IDR Act) subject to the exceptions specified in the
Act. SICA, including any rules or schemes made there under, had overriding

provisions over other laws except the provisions of the Foreign Exchange
Regulation Act, 1973 and the urban land (ceiling and regulation) Act, 1976.

Definition
The Sick Industrial Companies (Amendment) Act 1993 defines a sick industrial
company as follows:
A sick industrial company means an industrial company (being a company
registered for not less than 5 years) which has at the end of any financial year
accumulated losses equal to or exceeding its entire net worth

Causes of sickness
1) Internal Causes
2)External Causes

1) Internal Causes
Bad management ie inexperience, inefficiency, lack of professional
expertise, neglect and internal squabbles. Bad management could
be poor production management, poor labor management, poor
resources management etc. The Tiwari Committee report found
that 65% of the large sick units were affected by this problem.
Unwarranted expansion and diversion of resources
Poor inventory management of finished goods as well as inputs.
Failure to modernize the productive apparatus, change the product
mix to suit the changing environment.
Poor labor management relationship and the associated poor
worker morale and low productivity.
1. Lack of finance: This including weak equity base, poor utilisation of
assets, inefficient working capital management, absence of costing and
pricing, absence of planning and budgeting and inappropriate utilisation
or diversion of funds.
2. Bad production policies: The another very important reason for
sickness is wrong selection of site which is related to production,
inappropriate plant and machinery, bad maintenance of plant and
machinery, lack of quality control, lack of standard research and
development and so on.

3. Marketing and Sickness: This is another part which always afeects


the health of any sector as well as SSI. This including wrong demand
forecasting, selection of inappropriate product mix, absence of product
planning, wrong market research methods, and bad sales promotions.
4. Inappropriate Personnel Management: The another internal reason
for the sickness of SSIs is inappropriate personnel management policies
which includes bad wages and salary administration, bad labour relations,
lack of behavioural approach causes dissatification among the employees
and workers.
5. Ineffective Corporate Mangement: Another reason for the sickness
of SSis is ineffective or bad corporate management which includes
improper corporate planning, lack of integrity in top management, lack of
coordination and control, etc.

2) External Causes
Energy crisis arising out of power cuts or shortage of coal and oil
have been a serious problem for many industrial units.
Inability of the units to achieve optimum capacity due to shortage
of raw materials, poor agricultural output due to natural reasons
etc.
Infrastructural problems like transport bottlenecks
Shortage of working capital / liquidity constraints
Artificial economic constraints eg. Government control of product
mix and prices, competition faced by the unit and excess capacity
in the industry.
1. Personnel Constraint: The first most important reason for the
sickness of small-scale industries is not-availability of skilled labour or
manpower wages disparity in similar industry and general labour invested
in the area.
2. Marketing Constraints: The second cause for the sickness is related
to marketing. The sickness arrives due to liberal licensing policies,
restrain of purchase by bulk purchasers, changes in global marketing
scenario, excessive tax policies by government, and market recession.
3. Production Constraints: This is another reason for the sickness which
comes under external cause of sickness. This arises due to shortage of

raw material, shortage of power, fuel and high prices, import-export


restrictions.
4. Finance Constraints: Another external cause for the sickness of SSIs
is lack of finance. This arises due to credit restrains policy, delay in
disbursement of loan by government, unfavourable investments, fear of
nationalisation.

Industrial Sickness and its Incidence:


Sick industries refer to those units which perform poorly against expected
results, incur cash losses for consecutive years, gradually erode the entire
networth and obviously fail to service the debt obligations. The major
criteria to identify a sick unit may generally be listed as follows :
A unit incurring financial loss/not being capable to produce at / above breakeven point.

A unit incurring continuous cash losses


A unit having negative equity
A unit having excess of current liabilities over current assets.
A unit making defaults in payment of principal sums with interest.
A unit having low capacity utilisation
A unit having worsening debt-equity ratio.

Causes of sickness:
The deliberations elaborated on the causes of industrial sickness in
Section III & IV indicate that a number of factors, both internal and
external are responsible for turning an industrial unit as sick.
The major causes pushing the industrial units towards sickness in
Bangladesh have been summed up in the following paragraph.
Management:

Lack of proper education, training, experience and business outlook of


the Sponsors/Entrepreneurs.
Poor Entrepreneurial skills
Poor Management
Poor Equity base
Lack of Integrity/Division of Funds.
Faulty Project Planning and Appraisal

Production/ Technical

Wrong choice of technology


Improper utilization of production capacity
Imbalanced and Defective Machinery
Poor Raw-material Planning
Inadequate Quality Control
Poor labour relations

Location problem
Marketing
Lack of Market Planning
Inadequate Market Survey
Poor Collections

Defective Pricing
Finance

Poor Management of Financial Resources


Delay in Mobilisation of Equity Funds
Faulty Costing
Adverse debt-equity combination

Lack of Proper Accounting system

Personnel
Lack of Competence
Lack of Loyalty
Lack of Professionalism

EXTERNAL
Govt. Policy & Implementation
Frequent Policy changes
Lack of Proper Implementation of Industrial Policies
Liberal Import Policies
Poor Infrastructure / Frequent Power Disruption
Smuggling
Fiscal Anomalies
Exchange Rate Fluctuation
Lack of Co-ordination between various ministries and Govt.
Departments, etc.
Over-Saturation of particular industry type / Sector due to wrong policy
Non-availability of Raw-material, etc.

Bank & Financial Institutions:


Non-availability/Inadequacy of Working Capital
Lack of required financial assistance for BMRE
High rate of Interest on bank loan
Lack of timely decision & support by the banks and financial institutions.

Environment:
Political Unrest
Labour Unrest
Market Recession
Delay in Project Implementation

Preventive Measures:

Experience indicates that small industrial units fall sick much to the occurrence
of external causes while medium and large industries get exposed to sickness
largely due to internal causes.
Though it would be hardly impossible to eliminate the causes altogether,
attempts should be made to undertake measures that would reduce the
magnitude of ailment in the industrial units for healthy survival and growth.
Viewed in this context, the following measures may be suggested to prevent
industrial sickness:
Macro-economic Policy changes: The industrial entrepreneurs should
make their own appraisal within a predictable macro-economic
environment. For this, policy changes should not be abrupt, have to be
pre-announced and gradual.
Sub-Sectorwise Long term Policy: For each sub-sector, the long-term
policy (e.g. for a period of 5 years) should be announced by the
Government so that entrepreneurs appraisal of the policy implications do
take a near-accurate shape.
Implementation of the Announced Polices: There should be effective
co-ordination amongst the various ministries, Govt. Departments and
relevant agencies involved for proper implementation of policies related
to industrialization.
Development of Small Industry Sector: The small industry sector is
characterized by low-level of technology, low equity base, traditional
management practices, poor marketing outlets and undeveloped subcontracting arrangement. The small industries should not be left to the
market forces only.
The following measures may be taken for preventing sickness in the
small scale sector :
Arranging access to institutional credit at reasonably lower rate of
interest.
Industrial Estates equipped with the required facilities should be set up in
suitable locations.
Entrepreneurship and Technology training should be arranged and then
linked with the provision of credit facilities. A national level training
institute for entrepreneurship development in the small scale sector
should be set up. Meanwhile, BSCIC Training Institute and DCCI
Business Institute may be strengthened for upgradation of capability of
the existing entrepreneurs.

Sub-contracting arrangements should be made by establishing


complimentary relationship with the medium and large industries.
Government supplies may be procured from small industries as far as
possible.
Data Bank should be developed at the Chamber Bodies/BOI/BSCIC to
facilitate the adequate flow of market-related information.
There may be one marketing agency entrusted with the responsibility of
purchasing all goods manufactured by SSI units (Say, upto Tk. 10 million
investment) and the task of channeling sales through various sales depots.
Rationalization of Tariff : In cases where deemed necessary, some
protective measures should be taken by restricting import of the locally
produced finished goods so that fiscal anomalies could be removed.
Improvement of Infrastructural Facilities: Insfrstructural facilities
including utilities should be made available to the entrepreneurs at low
cost and at the appropriate time.
Monitoring of Saturation in Particular Industry Sub-sector: There
should be some agency entrusted with the task of monitoring the
establishment of too many units in the same sub-sector so that overcrowding could be prevented.
Development of Linkage Industries: In order to mitigate the problem of
non-availability/scarcity of raw-material as well as marketing of finished
goods, backward and forward linkage industries should be set up in a
planned way. Moreover, close linkage of Industry with agriculture will
help ease problem of scarcity of raw-material.

Expansion of Market Base through Increased Exports : Domestic


market is gradually getting squeezed due to the influx of officially
imported foreign goods and smuggled goods. On the one hand, export
market should be expanded by increasing the number of exportable
products. On the other, anti-smuggling drive should be strengthened. For
this, import policy should be restructured in a way that discourages
smuggling to a great extent.
Use of Predictive Models : Banks and entrepreneurs should follow some
predictive models for early detection of sickness on the basis of
evaluation of financial health of the industrial units.
Facilitation of Enabling Environment: Deterioration of Law and Order,
extortion, harassment etc. should be checked at any cost. In case of
natural calamities, special assistance should be provided for resilience.

Revival of sick unit


Despite all preventions and sincerity of the policy-makers and stakeholders,
some industrial units would genuinely face sickness. In order to provide scope
for timely revival of those units, efforts should be underway from all concerned.
However, some unviable units should be allowed to die a natural death without
delay.
The suggested remedial measures for the industrial units approaching towards
sickness and already turned sick, are as follows :
Every bank and financial institution should have a "Project Rehabilitation
Cell" manned by the experts of various disciplines. There should be
ongoing process of evaluation of the heath of the assisted units by the
banks to detect early warning signals. For this, congenial bank-client
relationship is a must for extending co-operation to each other.
Debt restructuring : Genuine sick units capable of being revived should
be allowed rehabilitation package by way of rescheduling of existing
loans, waiver/remission of interest payments, conversion of short term
liabilities into long term obligations, etc. depending on the merit of the
each case.
There might be one "Interest Remission Committee" to be formed by the
Govt. from time to time to address the genuine problems of small sick
units (where investment ceiling may be upto Tk. 1 crore). However, this
step should not encourage the non-sick units to avail of this temporary
facility. The screening process should be strict enough to select the
genuine sick units for such concession. As it was followed previously, the
Govt. may compensate upto 50% of the waived interest to the concerned
banks.
If necessary, change of management of the sick units should be brought
in, to facilitate successful running of the projects.
Only financial and management rehabilitations of the sick units will not
bring the desired result unless Govt. assistance in the form of reduced
taxes, duties, concessions on various charges like gas, electricity, etc.,
imposition of restriction on related import items etc are made available.

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Bangladesh Bank may set up a Sick Industry Cell to monitor the


performance of the lending institutions in handling the problems of sick
units and to co-ordinate the rehabilitation efforts of banks, financial
institutions, Govt. and other agencies involved.
Possibilities of mergers and acquisitions may be explored in case of sick
industrial units not capable of being revived by their own strengths.
Suitable policy guidelines may be framed in this regard
SOEs found chronically sick should not be allowed to operate in the
limping state any further. In case of sick SOEs capable of being revived,
disinvestment process may be expedited.
The provisions of Bankruptcy Act should be strictly enforced in case of
sick industrial enterprises with liabilities for exceeding assets.

Reason for revival:


Need for revival/rehabilitation programme is as follows:
A sick company has already swallowed huge scarce resources. In order to utilize
the assets and infrastructure already created for the project, the project is to be
revived from sickness.
Revival of a sick unit may be necessitated, because
1. The project may be in a sector that is vital to the economy.
2. Many ancillary units may be dependent on the unit that has gone sick. Unless
the sick unit is revived, it will have a chain effect of all such dependent ancillary
units becoming sick.
3. Banks and financial institutions would have locked up their money in sick
ventures.