Question

What is industrial sickness explain the consequences and rbi guideline for preventing?

Answer 1

One of the adverse trends observable in the corporate private sector of India is the growing incidence of sickness. It is causing considerable concern to planners and policymakers. It is also putting a severe strain on the economic system, particularly on the banks.

There are various crite­ria of sickness. According to the criteria accepted by the Reserve Bank of India “a sick unit is one which has reported cash loss for the year of its operation and in the judgment of the financing bank is likely to incur cash loss for the current year as also in the following year.”
A major symp­tom of sickness is a steady fall in debt-equity ratio and an imbalance in the financial position of the unit. Simply put, a sick unit is one which is unable to support itself through the operation of internal resources (that is, earnings plough-back). As a gen­eral rule, the sick units continue to operate below the break-even point (at which total revenue = total cost) and are, thus, forced to depend on exter­nal sources for funds of their long-term survival.

Industrial sickness creates various socio-eco­nomic problems. When an industrial unit falls sick those who depend on it have to face an uncertain future. They fear loss of jobs. Even if they do not lose jobs they do not get their wages and compen­sation in time and are, thus, forced to live in ex­treme hardship.

Of course, sickness is not a special problem of India. It is, undoubtedly, a global phenomenon. Even in industrially advanced countries there are numerous cases of bankruptcy or liquidation. These sick units are nursed back to health through merg­ers, amalgamations, takeovers, purchase of assets, or outright nationalisation. When the-problem becomes really alarming or unmanageable, the unit is permitted to die its natural death.

Causes:

Industrial sickness has become a major problem of the India’s corporate private sec­tor. Of late, it has assumed serious proportions. A close look reveals that there are, at least, five ma­jor causes of industrial sickness, viz., promotional, managerial, technical, financial and political.