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Financial Management of Sick Units

1) Industrial sickness is a major problem in India, locking up tens of thousands of crores of bank and institutional funds in sick small, medium, and large units. 2) A unit is classified as sick if it has cash losses for one year and is likely to have continued losses, or has an imbalance in its financial structure like a current ratio less than 1:1 or a worsening debt to equity ratio. 3) Sickness can be caused by external factors like changes in government policy or competition, or internal factors like improper production, marketing, financing, or personnel management.

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Prema Latha
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126 views21 pages

Financial Management of Sick Units

1) Industrial sickness is a major problem in India, locking up tens of thousands of crores of bank and institutional funds in sick small, medium, and large units. 2) A unit is classified as sick if it has cash losses for one year and is likely to have continued losses, or has an imbalance in its financial structure like a current ratio less than 1:1 or a worsening debt to equity ratio. 3) Sickness can be caused by external factors like changes in government policy or competition, or internal factors like improper production, marketing, financing, or personnel management.

Uploaded by

Prema Latha
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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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

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