Industrial Sickness| Meaning |Definition| Signals or Symptoms of Sickness
Problem of industrial sickness is not specific to any industry or country. The approach to sickness is to restore a unit to normalcy through restructuring devices within a short period of time or else close it down. Such easy and straight forward options are not available to labor abundant economies like India which can ill afford large scale unemployment either of labor or of valuable productive assets caused by sickness.
Further, sizeable funds of banks and financial institutions and blocked up in sick units which impair the banks profitably and their ability to recycle fund in other productive areas. This has an adverse effect on the economy of country like India. Thus, industrial sickness is a result of faulty management policies as well as fiscal problems. Under such circumstances, fiscal reforms program with a determined management and relevant management policies for revival of sick industries are need of the hour.
“Industrial development is identified as the effective means to the economic growth in any country. Industrial sickness has become a common feature of the large scale sector as well as small scale sector. In spite of the enactment of special legislations and various steps taken by the government and RBI to deal with the problem, industrial sickness is growing. The liberalization of the economy resulting into increased competition has added to the problem of industrial sickness.” “Closures of business units and corporate failures resulting in bankruptcies have become a normal feature in market economies the world over”.
Growing competition and the ever-changing international economic environment often lead to high incidence of corporate failures in developed market economies. However, these economies have the resilience to absorb the economic disturbances brought about by the closure of industrial units. In order to combat the problem of industrial sickness, a comprehensive assessment of the magnitude of industrial sickness and an analysis of the main factors which bring about sickness are necessary.
Both prevention and cure of industrial sickness would depend on our ability to identify sickness as early as possible and analyze its causes. Faulty or delayed identification would reduce the effectiveness of the remedial action such as restoring the financial viability of sick units and protecting units which would become sick.
The problem of industrial sickness is nothing peculiar to our economy or any developing country. It is also present in the advanced countries, hut there it is considered prudent to shut down the units if they are sick. But in developing countries, like India, one cannot afford to do so as it will lead to substantial block of national capital to go waste and create unemployment of those already employed, when additional employment is a crying need of the hour. Even ‘not so fit’ or ‘unfit’ industries may have to be rendered a helping hand to raise and stand on their own, to avoid wastage or total loss of funds and other resources already invested therein.
Meaning of Industrial Sickness:
The strength of the industrial sector, by and large, determines the soundness of the economy.
A developing economy like India cannot afford the growing sickness in industries as it results in a colossal wastage of physical, financial and human resources. In the presence of the resource crunch, the industrial sickness becomes all the more an alarming problem. Industrial sickness usually refers to a situation when an industrial firm performs poorly, incurs losses for several years and often defaults in its debt repayment obligations.
The Reserve Bank of India has defined a sick unit as one “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, such as, current ratio is less than 1: 1 and there is worsening trend in debt-equity ratio.”
The State Bank of India has defined a sick unit as one “which fails to generate an internal surplus on a continuous basis and depends for its survival upon frequent infusion of funds.”
Which type of unit are sick?
- To a Layman: A sick unit is one which is not healthy
- To an Investor: It is one which is not giving Dividends.
- To a Banker: It is a unit which has incurred cash losses in the previous year and is about to repeat the same performance in current and following years.
- To an Industrialist: It is a unit which is making losses and about to close.
Signals or Symptoms of Sickness
- Decline in capacity utilization
- A general decline in that particular industry
- Increase in the consumption of overdraft facilities
- Increase customer complaints
- Larger and longer outstanding in bill.
- Slow growth
- Falling reputation of the company in the market
- Autocratic one-man rule
- Window-dressing & creative accounting
- Cumbersome administrative procedure
- Failure to pay statutory liabilities
- High rate of rejection of goods by the customer
- Downward trends in sales and profits.
- Diversion of fund other than running the unit.
- Existence of a large number of law suits against a company.
- Inhuman treatment of people.
- Any major changes in shareholding.