Major Causes of Sickness in Small Scale Industries and Remedies

Major Causes of Sickness in Small Scale Industries

Small Scale Industries (SSIs) play vital role in the economic development of a country. Some SSIs turn out to be sick due to various reasons. Some of the major causes for sickness in small scale industries are dealt in brief.

Sickness in SSI - Causes and Remedies

Sickness in SSI – Causes and Remedies

1. Inadequacy of working capital

Some units turn out sick due to inadequacy of working capital. There may exists delay in sanction of working capital by financial institutions. Industrial units find it difficult to meet out day to day operations due to the time gap between sanction of term loan and working capital needs. Shortage of Working Capital is one of the main reasons for sickness.

2. Non-availability of credit

Sickness in SSI sector may be attributed to non-availability of credit. Delay in getting loans may result in stoppage of work or lead to production loss. Low production may lead to reduced sales which in turn may lead to financial loss.

3. Poor and obsolete technology

Some industrial units use technology which is outdated. Out dated technology may affect the quantity and quality of production. This results in production loss and reduces demand for the goods.

4. Non availability of raw material

Some units may require raw material which are scarcely available. Sometimes, the raw material required by the unit may not be available in abundance. Hence, this affects the production and the sales of the goods. If the raw material is not abundantly available, then the industrial units have to spend a large amount of money to buy them. This may result in financial loss.

5. Marketing problems

Sometimes, the industrial units may not know as to how to create demand for the products. Lack of marketing knowledge may result in less demand for the goods. Similarly, there may be less demand for the goods produced by the SSI due to competition or change in the taste of the buyers.

For example, lot of units producing dyes and ceramics have been found sick in Gujarat and Tirupur.

6. Erratic power supply

Shortage in power supply affects the industries. This results in delay in production of goods and leads to financial losses.

7. Labour problems

The relationship between the employer and the employees may not be cordial. Some of the labour problems such as strike, lay off, lock out may lead to industrial sickness.

8. Poor Management

The entrepreneur must be a good planner, organizer and a manager. If the Industrial Unit promoters lack managerial skills, then it may lead to several problems.

9. Inadequate attention to R&D

Industries have to allocate a part of money in research and development to survive and compete with competitors. Failure to focus on the above may lead to industrial sickness

10. Diversion of resources

If the employer utilizes the funds obtained for the business for any personal purposes, then diversion of funds will lead to industrial sickness. The funds used for personal purposes cannot be regenerated and hence it may result in delay in payment of loans or financial crisis for the borrower of the loan.

11. Globalization

Small scale industrial units may find it very difficult to compete with large scale industries and foreign competitors. Inability of the units to face growing competition due to liberalization and globalization may lead to industrial sickness.

12. Dispute among partners

There may arise dispute between the partners or family members running the unit. This results in stoppage of work and leads to industrial sickness.

13. Overambitious projects

The project may not be technically feasible, such an overambitious project is one of the reasons for industrial sickness.

Remedial measures to overcome Sickness

Some of the remedial measures to curb and overcome sickness in industrial undertakings are as follows:

1. Identifying sickness at initial stage

Sickness in Small Scale Industries are not a sudden phenomenon but it is a gradual process taking 5 to 7 years eroding the health of a unit beyond cure. Therefore, the identification and detection of the sickness at incipient stage is the first and foremost measure to detect and reduce industrial sickness. Sickness must be identified at initial stage.

2. Financial assistance

Lending agencies need to relax their lengthy process and other norms for extending credit to the SSIs. To combat the incidence of sickness financial institutions should grant credit without delay to SSI sector.

A number of initiatives can be undertaken to overcome credit problems such as:.

  1. Increasing Working capital limit.
  2. Enhancing the powers of bank managers of specialized bank branches in offering credit to SSI.
  3. Strengthening the mechanism for discounting bills.
  4. Reduced rate of interest.

These measures would improve the flow of credit and keep a check on the incidence of sickness.

3. Improving Infrastructure

Infrastructure facilities can be improved by setting up industrial estates. Common testing centres etc., infrastructural problems can be solved by improving the roadways, waterways, establishing telecommunication systems.

4. Technology Up-gradation

Funds may be provided by the financial institutions for adoption of advanced technology. Similarly, some sort of training may be provided for use of the latest technology to overcome technological problems. Technological up-gradation can help to overcome technological obsolescence.

5. Marketing assistance

Marketing assistance may be provided to entrepreneurs for marketing the goods produced by them. Government must help to market the goods. Government and Non Government Organizations (N.G.Os) can come forward for marketing the goods produced by the SSI sector. The problem of poor marketing of the products can be solved by coordinated efforts of entrepreneurs and promotional agencies.

6. Liquidation

It is better to wind up the business when there is no possibility to revive the unit.

7. Government Interventions

Interventions must be made by the government to prevent sickness. Periodic review of financial statements can help to identify and prevent sickness at initial stage.

8. Training

A proper environment must be created where an entrepreneur will be educated and will have a proper knowledge, skill and experience about internal and external environment of business to compete with large-scale industries and multinational companies.

9. Rehabilitation

Potentially viable sick units should be dealt well for the purpose of rehabilitation. Rehabilitation is a remedy considered for industrial units, which have already become sick and for the units that are on the verge of collapse.

Under the provisions of SICA, 1985, the Government of India has established Board for Industrial and Financial Reconstruction (BIFR) in January 1987 for determining the preventive, ameliorative, remedial and other measures which are required to be taken in respect of sick industrial company and for expeditious enforcement of rehabilitation schemes.

The main objective of SICA is to determine sickness and expedite the revival of potentially viable units or closure of unviable units (unit here in refers to a Sick Industrial Company). It was expected that by revival, idle investments in sick units will become productive and by closure, the locked up investments in unviable units would get released for productive use elsewhere.

The measures taken by BIFR are

  1. Legal
  2. Financial restructuring
  3. Managerial

Rehabilitation Programmes

Taking into consideration the many sick micro, small and medium (MSM) industries, the MSM policy has provided a separate package for rehabilitation of such industries in India.

The policy proposes to set up a rehabilitation fund for sick industries, which will be managed by the Industries Commissioner and the Director of Industries and Commerce. Funds will be infused into the committee based on the recommendation of a State-Level Rehabilitation Committee (SLRC).

The rehabilitation fund, among other things, will be used for meeting 75 percent of the cost of the cause that made the industry unviable, and to sanction an interest subsidy of 4 per cent for two years on rehabilitation/bridge loans up to Rs.15 lakh to the sick MSM industries.

The rehabilitation measures would ensure that most units under lockout would be able to open at an early date and appealed to MSM units to avail of the facilities the government was providing them.

The rehabilitation programme involves the following depending upon the nature of sickness.

  1. Change of Management
  2. Development of a suitable management information system
  3. Settlement with the creditors for payment of their dues in a phased manner, taking into account the expected cash generation as per viability study.
  4. Determination of the sources of additional funds needed to refinance.
  5. Modernization of plant and equipment or expansion of an existing programme or even diversification of the products being manufactured.
  6. Concession or relief or assistance allowed by the state level corporation, financial institutions and Central Government.