Various Causes of Industrial Sickness

Industrial sickness is a prevalent issue affecting businesses of all sizes, from small-scale enterprises to large corporations. The Causes of Industrial Sickness can be categorized into internal and external factors. Internal factors include poor management, inappropriate location, labor disputes, insufficient working capital, and inadequate marketing efforts. On the other hand, external factors include challenges like competition from larger companies, sudden policy changes by the government, lack of essential infrastructure, and technological obsolescence.

Understanding these causes is essential for businesses to take proactive measures to effectively prevent and address industrial sickness. By addressing internal and external factors, companies can enhance their resilience and sustainability in the face of challenges.

Sickness in Small-Scale Sector

In the course of industrialization, some business units are likely to fail In India. Our information uncovers that the level of industrial diseases is up and running. And Typically 55 units call sick every day. 

Industrial sickness is a problem that affects both private companies and public sector organizations. It can affect not only small units but also large units. However, compared to large units, small units are more prone to sickness.

Meaning and Definition of Sick Units

Getting sick is a metaphor for an ill unit, which can also mean the unit is not happy. Different terms may be used and for the same diseases by different people. Workers understand that according to the signal that they don’t receive payment and other benefits, they are in the wrong. 

Investors consider a unit sick when they do not get a reasonable return on capital employed. Similarly, financial institutions feel a unit sick when they fail to repay the installment loan and interest. 

A firm becomes sick when it doesn’t earn enough money to cover its expenses. This also occurs when the return on investment is lower than the firm’s cost of capital.

Before 1985, there was no agreement on how to define struggling businesses. The Sick Industrial Companies Act (Special Provision) was put into effect in 1985. Let’s look at the definition of Sick Units from the RBI

RBI defined a Sick Unit as, “one which has incurred cash loss for one year and in the judgment of the Bank it is likely to continue to incur cash losses for the current as well as the following year and which has an imbalance in its financial structure, such as the current ratio of less than 1:1, higher debt also makes it harder for poor countries to borrow which could end up harming them even more.”. 

RBI

Causes of Industrial Sickness

These self-starters or businesses may stem from a failure to appraise accurately their future potential or the inability of certain shortcomings to be remedied during implementation. A few tasks might be the result of quarrels reaching unreasonable heights and/or an internal issue. 

Another issue that is harder to plan for is what will happen when some groups are faced with sickness that can be caused externally. Hence, the key reasons for industrial sickness can be classified into two groups – concepts and the nature of external.

Internal Causes

Internal causes are those causes that management can control, and, preferably, either avoid or prevent. Following are the important internal causes of sickness:

• Wrong location of the industrial units
• Poor quality of product 
• Poor marketing efforts
• Defective capital structure
• Poor management: 
• Disputes among managerial personnel: 
• Lack of adequate working capital 
• Underutilization of capacity 
• Labor problems 
• Mismanagement of funds 

Wrong location of the industrial units

One of the key internal causes of industrial sickness is the wrong location of the industrial unit. The location of a business plays a crucial role in its success. If a business is situated in an area where there is a lack of demand for its products or services, it can lead to a decline in sales and ultimately financial troubles. Similarly, if the location hampers the availability of essential resources or skilled labor, it can hurt the productivity and efficiency of the business.

Poor quality of product 

Another internal cause of industrial sickness is the poor quality of the product. If a business fails to deliver high-quality products or services that meet the expectations of its customers, it can lead to a loss of reputation and customer dissatisfaction. This can result in reduced sales and revenue, ultimately leading to financial difficulties for the.

Poor marketing efforts

 Ineffective marketing efforts can also contribute to industrialization. If a business fails to effectively promote its products or services to the target audience, it may struggle to attract customers and generate sales. Lack of proper advertising, inability to identify key marketing channels, or failure to understand customer preferences can all lead to a decline in business growth and profitability.

Defective capital structure

The capital structure of a company to the mix of debt and equity used to finance its operations. A defective or imbalanced capital structure can be another internal cause of industrial sickness. If a company relies too heavily on debt financing or has inadequate equity capital, it can lead to financial instability and an inability to meet financial obligations such as loan repayments or interest payments. This can result in financial distress and ultimately lead to the company’s downfall.

Poor management: 

Another internal cause of industrial sickness is poor management Inefficient or ineffective management practices can have a detrimental impact on the overall functioning and performance of a business. This can include issues such as lack of strategic planning, weak decision-making, poor communication, inadequate supervision, and lack of motivation among employees. These factors can lead to a decline in productivity, low employee morale, and a failure to adapt to changing market conditions, ultimately resulting in the deterioration of the business.

Disputes among managerial personnel: 

Internal conflicts and disputes among managerial personnel can be a significant cause of industrial sickness. When there is a lack of harmony and collaboration among key decision-makers, it leads to a breakdown in communication and decision-making processes. Disagreements, power struggles, or personal conflicts can divert attention away from strategic objectives and hinder the overall progress of a company. It can create a toxic work environment, decrease employee morale, and potentially lead to poor decision-making that adversely impacts the business.

Lack of adequate working capital 

External causes of industrial sickness are factors that originate outside of the company but have a significant impact on its operations and performance. These can include:

Underutilization of capacity 

Underutilization of capacity occurs when a company is not effectively utilizing its available resources, such as machinery, equipment, or manpower. This can be due to various reasons, such as a decrease in demand for the company’s products or services, changes in market conditions, or inadequate marketing and sales efforts. When a company is unable to maximize its production capacity, it leads to inefficiency, higher costs, and a decline in profitability, ultimately contributing to industrial sickness.

Labor problems 

Labor problems can be both internal and external causes of industrial sickness. Internally, issues such as strikes work stoppages, or labor disputes can disrupt regular operations, lead to delays in production, and negatively impact the overall performance of a company. External factors that can contribute to labor problems include changing labor laws or regulations, economic downturns that result in layoffs or downsizing, or global trends that affect the demand for certain industries or job roles. When labor problems persist and are not effectively resolved, they can lead to a decline in productivity, increased costs, and overall instability within the organization.

Mismanagement of funds 

Mismanagement of funds is another cause of industrial sickness. When a company does not effectively allocate or utilize its financial resources, it can lead to a severe imbalance between income and expenses. This can result in a cash flow crisis, inability to meet financial obligations or even bankruptcy. Some common examples of mismanagement of funds include excessive spending on non-essential items, improper budgeting and financial planning, inadequate control over expenses, or fraudulent activities. Companies must have proper financial management systems in place to effectively monitor and control their financial resources.

External Causes

One leakage on the EUP of the facility’s management is the external causes that they have no control over and are largely the result of external factors. The following are the important external causes of sickness:

• Competition from large businesses can be a sign of industrial sickness. 
• Sudden changes in Government policies 
• Lack of infrastructure facilities. 
• Incapacity to procure credit 
• Heavy taxes
• Delay in providing finance by financial institutions 
• Government regulations 
• Technical obsolescence

Competition from large businesses can be a sign of industrial sickness. 

When a company faces intense competition from larger, more established businesses, it can struggle to capture market share and generate consistent revenue. Large businesses often have access to greater resources, economies of scale, and established brand recognition, making it difficult for smaller or newer companies to compete effectively. This can result in a decline in sales, lower profit margins, and ultimately, industrial sickness.

Sudden changes in Government policies 

Sudden changes in government policies can also contribute to industrial sickness. When government regulations, laws, or policies change abruptly, companies may struggle to adapt and comply with the new requirements. This can lead to disruptions in operations, increased costs to implement necessary changes, or even closure of the business if the company is unable to meet the new standards. Examples of sudden government policy changes that can impact industries include changes in tax regulations, import/export restrictions, labor laws, or environmental regulations. Companies need to stay informed and proactive in understanding and adjusting to any changes in government policies that may affect their business.

Lack of infrastructure facilities. 

Incapacity to procure credit. Lack of adequate infrastructure facilities can also contribute to industrial sickness. This includes the availability of transportation services, communication networks, banking facilities, and access to technology. Without proper infrastructure, companies may struggle to efficiently transport goods, communicate with customers or suppliers, access financial services, or incorporate technology advancements into their operations. These limitations can hinder productivity and competitiveness, leading to a decline in business performance and eventual industrial sickness.

Incapacity to procure credit 

Lack of access to credit can significantly impact a company’s growth and sustainability. Many businesses rely on credit to finance their operations, invest in new equipment or technology, expand their production capacity, or manage cash flow fluctuations. However, if a company is unable to secure credit from financial institutions or lenders, it may be forced to operate with limited resources or resort to expensive borrowing options. This can strain the company’s financial health and restrict its ability to invest and grow, potentially leading to industrial sickness.

Heavy taxes

Heavy taxes and stringent regulatory burden. Excessive taxation and regulations can also be major causes of industrial sickness. High taxes can eat into a company’s profits and reduce its ability to invest or expand. Similarly, complex regulatory requirements can increase operating costs, hinder efficiency, and create barriers to entry for new businesses. Over time, these burdensome tax and regulatory environments can hinder the growth and competitiveness of companies, leading to a decline in their financial performance and eventual industrial sickness.

Delay in providing finance by financial institutions 

Furthermore, another cause of industrial sickness is the delay in providing finance to financial institutions. Many companies rely upon loans and financial support from banks and other financial institutions to meet their working capital needs, invest in new projects, or expand their operations. However, if financial institutions delay in providing the required finance or impose stringent conditions for approval, companies may face cash flow problems, inability to pay bills or employees, and difficulty in meeting their financial obligations. This can lead to a decline in business performance and ultimately result in industrial sickness.

The limited financial base of promoters Another cause of industrial sickness is the limited finances of promoters. In many cases, businesses are started by entrepreneurs with limited capital or resources. While this may not necessarily be a problem at the beginning, it can become an issue as the business grows and faces financial challenges. Limited financial resources can hinder a company’s ability to invest in critical areas such as research and development, marketing, or hiring skilled employees. This can result in reduced competitiveness, declining sales, and ultimately, industrial sickness.

Government regulations 

Government regulations and policies that are not conducive to business growth. Unfavorable government regulations and policies can also contribute to industrial sickness. This can include policies that restrict foreign investment, impose high import duties, or create barriers to entry for new businesses. Additionally, inconsistent or constantly changing regulations can create uncertainty, making it difficult for businesses to plan and make-term investments. These factors can negatively impact the financial stability and growth of companies, leading to industrial sickness.

Technical obsolescence

Technical obsolescence Another significant cause of industrial sickness is technical obsolescence. In today’s fast-paced world, technology is constantly evolving and companies that fail to keep up with these advancements can find themselves at a disadvantage. Outdated machinery, outdated production techniques, or an inability to embrace new technologies can lead to decreased productivity, poor product quality, and increased costs. This can result in a loss of market share, reduced profitability, and ultimately, industrial sickness.

Remedial measures for industrial sickness

Industrial pollution is a crucial issue for our country as it is considered a social problem by people. Therefore, various concessions and incentives are given to sick units in the hope that these will enable them to regain health and stand on their feet once again. Here is a short overview of the actions taken by the Government working together with RBI to help recover and revive struggling businesses:

Sick Industries Policy, 1978. 

The Sick Industries Policy, 1978, spearheaded by the government in collaboration with the Reserve Bank of India (RBI), was a pivotal initiative aimed at identifying and rehabilitating struggling industrial units. This policy laid down mechanisms for early detection of signs of industrial sickness, such as consistent losses, erosion of net worth, and inability to pay debts. One of the critical aspects of this policy was the establishment of Board for Industrial and Financial Reconstruction (BIFR) to expedite the process of determining the viability of sick units and formulating revival plans for potentially viable units. The BIFR’s role was crucial in ensuring that these units received the necessary financial restructuring and support to return to profitability.

Additionally, the policy emphasized the importance of providing technological assistance to sick units to overcome technical obsolescence, which is one of the key causes of industrial sickness. Efforts were made to facilitate the modernization and technological upgradation of these units through various schemes and incentives. This included access to newer technologies, adoption of improved production techniques, and training for employees to handle modern machinery and equipment.

Furthermore, the government also offered tax reliefs and exemptions to encourage sick units’ recovery. These financial relief measures were aimed at improving the cash flow of sick industries, enabling them to invest in essential areas for recovery and growth. The policy also encouraged banks and other financial institutions to take a more flexible approach in dealing with sick units, including restructuring of loans, extending additional credit facilities, and relaxation of repayment schedules.

The Sick Industries Policy, 1978, marked a significant step towards the systematic approach to industrial sickness in India, recognizing the importance of preserving the industrial base and protecting employment. By addressing the multifaceted issues leading to industrial sickness, the policy aimed to restore the competitiveness and sustainability of ailing units, contributing to the overall health of the country’s industrial sector.

Sick Industries Policy, 1981. 

Building on the foundation laid by the Sick Industries Policy, 1978, the Sick Industries Policy, 1981 introduced further enhancements and modifications to address the evolving challenges faced by industrial units. This iteration of the policy aimed to streamline the process of identifying and rehabilitating sick industries with a more defined and aggressive approach towards financial restructuring and operational turnaround strategies.

Key to this policy was the strengthening of the Board for Industrial and Financial Reconstruction (BIFR), empowering it with more authority to make decisive actions on the fate of sick units. The policy also expanded the criteria for identifying sick industries, incorporating more sophisticated financial indicators to catch issues at an earlier stage, potentially leading to more successful recoveries.

The 1981 policy placed a significant emphasis on the role of financial institutions in the rehabilitation process. It promoted a collaborative approach between banks, government agencies, and the industries themselves to work together in crafting viable recovery plans. This included the possibility of converting debt into equity to alleviate the financial burden on sick companies, thus giving them a lifeline to regain their footing in the market.

Furthermore, the policy encouraged private sector participation in the revival of sick units through mergers, acquisitions, and strategic partnerships. This was aimed at injecting fresh capital and management expertise into struggling companies, enhancing their chances of successful turnaround.

In essence, the Sick Industries Policy, 1981, sought to refine the mechanisms for dealing with industrial sickness in India by introducing more flexible, quicker, and more effective strategies for the revival of ailing units. This policy represented a critical step towards creating a more robust and resilient industrial sector capable of withstanding economic fluctuations and maintaining steady growth.

Sick Industrial Companies (Special Provisions) Act 1985

The Sick Industrial Companies (Special Provisions) Act 1985 (SICA) was introduced as a legislative response to the growing concern over industrial sickness in India. The act’s primary objective was to identify, secure, and revive companies that were potentially viable but facing financial hardship, thereby preserving industrial assets and employment. SICA established the Board for Industrial and Financial Reconstruction (BIFR), providing it with a statutory basis to operate and make binding decisions regarding the fate of sick industrial units. Under SICA, companies were required to report their sickness to the BIFR, which would then conduct inquiries, devise and oversee rehabilitation schemes, or recommend closure if revival was deemed not feasible.

One of the hallmarks of SICA was its attempt to streamline and expedite the process of identifying and restructuring sick industrial units through legal and financial frameworks. The act provided a clear definition of what constituted a ‘sick industrial company’—one that had existed for at least five years and had incurred accumulated losses equal to or exceeding its entire net worth at the end of any financial year. This precise definition helped in the early detection and potentially quicker rehabilitation of sick units.

Furthermore, SICA gave the BIFR the authority to investigate the causes of industrial sickness comprehensively, including mismanagement, obsolete technology, or unfavorable market conditions, and to draft recovery plans that could include financial restructuring, modernization, amalgamation, or strategic partnerships. The act also facilitated a moratorium on the enforcement of certain contracts and legal proceedings against sick companies, granting them protection from creditors and time to focus on their revival strategies.

Despite its ambitious objectives, SICA faced criticism for its lengthy and bureaucratic processes, which often delayed the rehabilitation of sick units, and in some cases, led to further erosion of their value. Recognizing these challenges and the evolving economic landscape, the government of India eventually sought to replace SICA with more modern legislation that could more effectively address the issues of industrial sickness in a liberalized and globalized economic environment.

Board of Industrial and Financial Restructuration (BIFR)

The Board for Industrial and Financial Reconstruction (BIFR), established by the Sick Industrial Companies (Special Provisions) Act 1985, represented a milestone in India’s approach to handling industrial sickness. Its creation underscored a systemic framework aimed at addressing the complexities involved in reviving sick industries. The BIFR’s mandate included examining the viability of sick industrial units, facilitating their revival through appropriate schemes, or ordering their closure if recovery was not feasible. A significant aspect of the BIFR’s approach was its power to override existing contractual obligations and legal impediments that could hinder the restructuring process. This allowed for a more streamlined and focused effort towards the rehabilitation of ailing companies.

Despite the ambitious goals set for the BIFR, the body encountered numerous challenges. These included bureaucratic delays, limited enforcement power, and at times, a lack of coordination with other financial and regulatory authorities. Critics argued that while the BIFR was a step in the right direction, its effectiveness was hampered by systemic inertia and an evolving economic landscape that demanded more agile and market-driven approaches to industrial sickness.

Recognizing the limitations of the BIFR and the need for a more modern framework to deal with corporate distress, the Government of India initiated discussions and reforms leading to the eventual phasing out of the BIFR. This paved the way for the introduction of the Insolvency and Bankruptcy Code (IBC) in 2016, which aimed to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals in a time-bound manner. The IBC represented a paradigm shift in the approach towards resolving industrial sickness by focusing on creditor-driven insolvency resolution to maximize the value of assets of distressed companies and promote entrepreneurship.

Industrial Reconstruction Corporation of India (IRCI)

The Industrial Reconstruction Corporation of India (IRCI) was founded as a governmental initiative aimed at addressing the issue of industrial sickness by facilitating the revival and restructuring of distressed companies. Its principal objectives include:

• Providing Financial Assistance: To extend financial support through loans, advances, and investments to sick industrial units to aid their recovery and ensure their survival and growth.
• Restructuring and Revival: To devise, implement, and monitor restructuring schemes, including technological upgrades, management changes, and financial reorganization, for the revival of sick units.
• Expertise and Consultancy: To offer consultancy and advisory services in areas of project management, financial restructuring, and business strategies to improve the operational efficiency of industrial units.
• Coordination with Banks and Financial Institutions: To work closely with banks and other financial institutions to coordinate the restructuring of the financial liabilities and equity of sick companies for their sustainable turnaround.
• Asset Management: To manage and dispose of the assets of unviable companies in a manner that maximizes the recovery of investments and minimizes losses for stakeholders.
• Market Adaptability: To assist companies in adapting to market changes by encouraging diversification, modernization, and the adoption of new technologies.
• Preservation of Employment: To prioritize the preservation of employment during the restructuring process, aiming to minimize job losses and contribute to socio-economic stability.

The IRCI’s establishment represented a proactive step by the Indian government towards creating a supportive framework for the industrial sector, particularly focusing on aiding companies facing financial and operational challenges.

Functions of Industrial Reconstruction Corporation of India (IRCI) 

Its functions include:

• Diagnosis of Industrial Sickness: IRCI plays a critical role in the early identification and diagnosis of factors leading to industrial sickness. This involves comprehensive analysis of financial statements, market trends, operational efficiencies, and managerial capabilities to pinpoint the root causes of distress.
• Development of Revival Plans: Once a company is identified as sick, IRCI formulates detailed revival plans tailored to its unique needs. These plans encompass financial restructuring, operational optimization, strategic repositioning, and, where necessary, changes in management or governance structures.
• Implementation Support: Beyond planning, IRCI actively supports the implementation of revival strategies. This includes the provision of financial assistance, negotiation with creditors for debt restructuring, and oversight of the execution of operational changes.
• Monitoring Progress: Post-implementation, IRCI continues to monitor the recovered companies to ensure sustained performance improvement. This surveillance helps in making timely adjustments to revival plans and prevents the recurrence of sickness.
• Stakeholder Liaison: Throughout the process of industrial revival, IRCI serves as a pivot between the sick unit, its creditors, shareholders, employees, and other stakeholders. It ensures transparent communication and seeks to balance the interests of all parties involved, aiming for a consensus in the best interest of the company’s survival and growth.

This comprehensive approach by IRCI towards addressing industrial sickness underscores the importance of a coordinated effort that involves financial restructuring, operational improvements, and stakeholder engagement to revive distressed companies and sustain their contributions to the economy.

Steps taken by Banks

To give a hand fiscal banks provide a host of concessions to the newborn industries in the hope of better rehabilitating them. Some of these concessions are:

• grant of additional working capital facilities
• recovery of interest at reduced rates
• suitable moratorium on payment of interest
• use supporting documents simply (request for funds) that will be added to the customer’s invoice, etc.

IDBI’s Special Cell

Within the sickness finance wing of IDBI, there is a particular cell within the Rehabilitation Financing Division of the bank which is supposed to deal with the individual referrals sent to them by banks. The supervision department is accountable for the diagnosis of projects where they will identify the underlying cause and design the specific rehabilitation programs.

Sick Industrial Undertakings Cell

This is another cell set up in the RBI as a coordinating agency and a clearing house to get information relating to sick units. The central bank has directed the commercial banks accordingly to watch closely on sick units, also to support patients, and make out such units.

Measures taken by RBI

To address the continuing challenge of industrial sickness, the Reserve Bank of India (RBI) has taken several proactive measures aimed at both prevention and rehabilitation of sick units. Among the most recent initiatives, the RBI has streamlined its regulatory framework to facilitate quicker identification and resolution of stressed assets in the banking system.

This includes the introduction of the Prudential Framework for Resolution of Stressed Assets, which emphasizes early identification of financial distress and initiation of an expeditious resolution plan, thereby minimizing the economic impact of sick units on the broader economy.

Additionally, the RBI has enhanced its focus on corporate governance and risk management within financial institutions, encouraging them to adopt more robust mechanisms for monitoring the financial health of their borrowing entities.

These measures are complemented by the RBI’s ongoing efforts to strengthen the credit culture in the country, aimed at improving the overall financial discipline and making the revival of viable sick units more feasible.

Assistance by SFCS

State Financial Corporations have run a scheme for the rehabilitation of sick units. The Corporation provides relief and concessions to potentially viable sick units. The help is given through IDBI’s Refinance Scheme and following the rules of the Reserve Bank of India. Under this scheme, reliefs and concessions like:

• Funding of overdue interest b) Waiver of penal interest
• Re-scheduling of loan
• Margin money for additional term loan is provided

Services by Technical Consultancy Organisations (TCOs)

Following are the services offered by TCOS to sick units with low profitability:

• Diagnostic studies to assess the working of existing units and diagnose the reasons for sickness
• Rehabilitation plans for reviving sick units
• Providing technical, managerial, and commercial counseling

Margin Money Scheme

The scheme was evolved by the Central Govt. for the revival of viable sick small-scale industries. 

The Margin Money Scheme can be rephrased as the Collateral Scheme, which allows individuals to secure loans by providing a certain amount of money or assets as collateral. 

An alternative way to express the Margin Money Scheme is the Down Payment Scheme, where individuals are required to make an initial payment or deposit when purchasing a product or availing a service. 

The Margin Money Scheme can also be referred to as the Security Deposit Scheme, where individuals are required to provide a certain amount of money or assets as a guarantee for a loan or rental agreement.

Conclusion

In conclusion, industrial sickness can be attributed to various internal and external causes. Internal factors such as poor management, wrong location, labor issues, and inadequate working capital can lead to industrial sickness. On the other hand, external factors like competition from larger companies, changes in government policies, lack of infrastructure, and outdated technology can also contribute to the problem.

Understanding these causes is crucial for implementing effective remedial measures and preventing industrial sickness in small businesses. By addressing both internal and external factors, businesses can work towards sustainable growth and success.