financial management of sick unit

Introduction

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:

l  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.

l  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

Actual Sickness:

l  Erosion of net worth by 50% or more.

l  Units being closed for a total period of six months and more during the last year

l  Default in the payment of loan installments

In the Small scale sector, a unit is treated as sick, if it has:

l  Incurred cash losses in the previous accounting year and is likely to continue incurring losses in the current year and has an erosion in its net-worth to the extent of 50% or more and/or

l  Has defaulted on any interest payment for consecutive four quarters / of principal for  consecutive two quarters, with persistent irregularity in the operation of its cash credit limit.

Causes of sickness

Internal Causes:

l  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.

l  Unwarranted expansion and diversion of resources

l  Poor inventory management of finished goods as well as inputs.

l  Failure to modernize the productive apparatus, change the product mix to suit the changing environment.

l  Poor labor management relationship and the associated poor worker morale and low productivity.

External Causes:

l  Energy crisis arising out of power cuts or shortage of coal and oil have been a serious problem for many industrial units

l  Inability of the units to achieve optimum capacity due to shortage of raw materials, poor agricultural output due to natural reasons etc.

l  Infrastructural problems like transport bottlenecks

l  Shortage of working capital / liquidity constraints

l  Artificial economic constraints eg. Government control of product mix and prices, competition faced by the unit and excess capacity in the industry.

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 :

1. A unit incurring financial loss/not being capable to produce at / above break-even point.
2. A unit incurring continuous cash losses
3. A unit having negative equity
4. A unit having excess of current liabilities over current assets.
5. A unit making defaults in payment of principal sums with interest.
6. A unit having low capacity utilisation
7. A unit having worsening debt-equity ratio.

Summary of Causes

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

1. Lack of proper education, training, experience and business outlook of the Sponsors/Entrepreneurs
2. Poor Entrepreneurial skills
3. Poor Management
4. Poor Equity base
5. Lack of Integrity/Division of Funds

f.       Faulty Project Planning and Appraisal

Production/ Technical

1. Wrong choice of technology
2. Improper utilization of production capacity
3. Imbalanced and Defective Machinery
4. Poor Raw-material Planning
5. Inadequate Quality Control
6. Poor labour relations

Location problem

Marketing

1. Lack of Market Planning
2. Inadequate Market Survey
3. Poor Collections

Defective Pricing

Finance

1. Poor Management of Financial Resources
2. Delay in Mobilisation of Equity Funds
3. Faulty Costing
4. Adverse debt-equity combination

Lack of Proper Accounting system

Personnel

1. Lack of Competence
2. Lack of Loyalty

Lack of Professionalism

EXTERNAL

Govt. Policy & Implementation

a.       Frequent Policy changes

b.      Lack of Proper Implementation of Industrial Policies

c.       Liberal Import Policies

d.      Poor Infrastructure / Frequent Power Disruption

e.       Smuggling

f.       Fiscal Anomalies

g.      Exchange Rate Fluctuation

h.      Lack of Co-ordination between various ministries and Govt. Departments, etc.

i.        Over-Saturation of particular industry type / Sector due to wrong policy

j.        Non-availability of Raw-material, etc.

Bank & Financial Institutions

1. Non-availability/Inadequacy of Working Capital
2. Lack of required financial assistance for BMRE
3. High rate of Interest on bank loan

d.      Lack of timely decision & support by the banks and financial institutions.

Environment

1. Political Unrest
2. Labour Unrest
3. Market Recession

d.      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:

(i) 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.

(ii) 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.

(iii) 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.

(iv) 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 sub-contracting 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 :

1. Arranging access to institutional credit at reasonably lower rate of interest.
2. Industrial Estates equipped with the required facilities should be set up in suitable locations.
3. 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.
4. 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.
5. Data Bank should be developed at the Chamber Bodies/BOI/BSCIC to facilitate the adequate flow of market-related information.
6. 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.

(v) 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.

(vi) Improvement of Infrastructural Facilities: Insfrstructural facilities including utilities should be made available to the entrepreneurs at low cost and at the appropriate time.

(vii) 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 over-crowding could be prevented.

(viii) 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.

(ix) Active Support of Banks and Financial Institutions:

1. In case of industrial units where term loan is needed, the availability of working capital should be ensured as part of the financial package.
2. Banks should provide due attention to process the working capital needs of the industrial units without any delay.
3. BMRE Loan should be actively considered by the banks and financial institutions for the existing industrial units undergoing the reality of rapid change in technology so that productive capacities are not rendered idle/underutilized.
4. Interest rate on loan should be made lower by improving operational efficiency of the banks. This will help reduce financial costs of the industrial units and thus gain access to competitiveness.
5. Bank-client relationship should be based on understanding of the mutual problems and prospects for greater interest of survival of both the entities.
6. Banks should improve the quality of project appraisal in order to prevent the growth of born-sick projects and for that, availability of adequate and accurate data and skilled manpower have to be ensured.
7. Banks could fix up a time limit for sanction and disbursement of loan limits for helping timely implementation of the projects/utilization of capacity of the borrowing industrial units.
8. Monitoring system of the projects financed by the banks should be thoroughly intensive and for this, both off-site and on-site mechanisms should be used in conjunction with each other in order to take timely steps for prevention of sickness.
9. Educated entrepreneurs with technical know-how should be encouraged to set up industrial units. They should be provided with all possible support, both financial and non-financial without emphasis on collateral.

(x) 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.

(xi) 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.

(xii) 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.

6.3 Remedial Measures

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 :

       I.            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.

2. 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.
3. 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.
4. If necessary, change of management of the sick units should be brought in to facilitate successful running of the projects.
5. 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.
6. 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.
7. 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.
8. 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.

CONCLUSION:

Nothing is impossible if the management of these units’ implements sincerely the suggestions stated earlier in this chapter, and at the same time they try to win the whole-hearted and willing co-operation of the employees and achieve their enthusiastic participation and close association in the day-today working of these units. What these chronically sick and loss-making units require is the judicious combination of efficient financial administration and skilful personnel management. The management who manages men and money skillful may achieve impossibles.

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