Financial management of Sick

Units
 Industrial sickness is rampant in India
 Tens of thousands of crores of bank funds and
institutional resources are locked up in sick units
(large,medium and small)
 Incidence of sickness has been a cause of
considerable concern to the government,
financial institutions and banks (Economic
Survey)
 Sickness leads to acute financial embarrassment
 Definition of sickness
 Causes of sickness
 Symptoms of sickness
 Prediction of sickness
 Revival of sickness
RBI defines sick unit as
 One which has incurred cash losses for one year
and
 Is likely to incur cash losses for the current as
well as the following year and/or
 There is an imbalance in the unit’s financial
structure
-current ratio is less than 1:1
-debt/equity ratio is worsening
Varshney Committee constituted by the State
Bank of India
 One which fails to generate internal surplus

on a continuing basis and

 Is dependent for its survival on frequent

infusion of external funds

Term lending financial institutions classify a unit as
sick after considering any of the following
symptoms
 Default in meeting four consecutive half-yearly
installments of interest or principal in respect of
institutional loans
 Cash losses for a period of two years or
continued erosion in net-worth, say by 50%
 Mounting arrears on account of statutory and
other liabilities for a period of 1 to 2 years
An industrial unit may be regarded as sick if
 It faces financial embarrassment

 Its viability is seriously threatened by adverse

factors
 Unfavorable external environment
 Managerial deficiencies
-Production
-Marketing
-Finance
-Personnel
 Shortage of key inputs
 Changes in Government policies
 Emergence of large capacity leading to intense
competition
 Development of new technology
 Sudden decline in orders from the Government
 Shifts in consumer preferences
 Natural calamities
 Adverse international developments
 Reduced lending by financial institutions
PRODUCTION
 Improper location
 Wrong technology
 Uneconomic plant size
 Unsuitable plant and machinery
 Inadequate emphaisis on R & D
 Weak production and quality control
 Poor maintenance
MARKETING
 Inaccurate demand projection
 Improper product-mix
 Wrong product positioning
 Irrational price structure
 Inadequate sales promotion
 High distribution costs
 Poor customer service
FINANCE
 Wrong capital structure
 Weak budgetary control
 Poor management of receivables
 Bad cash planning and control
 Strained relationship with suppliers of capital
 Improper tax planning
PERSONNEL
 Ineffective leadership
 Bad labor relations
 Inadequate HR
 Over staffing
 Weak employee commitment
 Irrational compensation structure
 Delay or default in payment to suppliers
 Irregularity in the bank account
 Delay or default in payment to banks and
financial institutions
 Non-submission of information to banks and
financial institutions
 Frequent requests to banks and FI for
additional credit
 Decline in capacity utilisation
 Accumulation of inventories
 Excessive turnover of personnel
 Resort to creative accounting
 Decline in the price of equity shares and
debentures