IIBF MSME | SICKNESS, SYMPTOMS & THE WARNING SIGNALS OF SICKNESS
In this article, we will get through the meaning of sickness, symptoms of sickness, the warning signals of sickness, how the units are diagnosed & how the rehabilitation of sick units is done.
DEFINITION OF SICK MSE
As per the MSMED Act 2006, a Micro or Small Enterprise is considered to be have become sick, if:
- any of the its borrower account remains NPA for > or = 3 months,
- Its net worth has been eroded because of accumulated losses to the extent of 50% during the previous year.
The above criterion enables the banks to detect sickness early & take corrective action to revive the unit.
MAJOR CAUSES OF MSE BECOMING SICK:
There are far too many & varied reasons for sickness reaching in MSME sector. Here, we will mention some of the major ones:
- Working-capital (WC) is inadequate, delay in sanctioning working capital & time gap between sanction of TL & WC.
- technology being poor & obsolete
- problem related to raw material availability
- Inadequate demand of products or services of MSE
- Erratic supply of power
- Labour related problems
- constraints related to Infrastructure
- Poor Management
- Inadequate attention given to R&D
- resources are diverted outside the units
- Unit’s Inability to face growing competition because of liberalisation & globalization.
SYMPTOMS OF SICKNESS IN MSME
Below are some symptoms of sickness that helps in the early detection of the units where sickness is getting spreading. When these symptoms persist within the unit for a long period of time, they become symptoms.
These symptoms can be recognized from the performance of the plant, utilization of capacity, financial ratios, the market price of share & practices in the functional areas of production, marketing, finance & labor relations.
Some of the important symptoms of industrial sickness are mentioned below:
- There is shortage of cash,
- The financial ratios are deteriorating,
- There is widespread use of creative accounting,
- The share prices of the company are continuously tumbling,
- The unit is frequently requesting banks & financial institutions for loans,
- There is delay & default in the payment of statutory dues,
- The audit of annual accounts is getting delayed; and
- There seems to be demoralization among employees & desperation among the top & middle management level.
Although, the financial ratios, in all cases, cannot be considered as true symptoms of industrial sickness mainly due to 2 reasons:
- Because as a sickness-prone units, it usually try to present a better & sound image with the help of window dressing.
- As financial data is available after a gap of 1 year which makes the ratio-based decisions ineffective to some extent.
However, when they are identified earlier, it’s easy to tackle them easier.
SIGNALS OF INDUSTRIAL SICKNESS:
As it could be comprehended through the above-mentioned text that the industries do not fall sick overnight but rather it takes a number of years for them to actually fall sick. Which implies that the sickness signs could be there quite early in unit. These warning signs in several functional areas are termed as ‘signals’. Identification of them earlier helps resolving them earlier.
The various signals of industrial sickness are listed below:
- There are shortages of liquid funds to meet even short-term financial obligations;
- Inventories are getting stocked in excessive quantities;
- bank accounts are not being maintained on regular basis;
- plants and equipment’s are frequent going through breakdowns;
- There is decline in the quality of unit’s product or services;
- There is continuous irregularity in cash credit accounts (CC A/c);
- The plants are running on low capacity;
- There are a lot of fluctuations in profits,
- There is downward trend in sales & fall in profits & is also followed by contraction in the share prices;
- The unit is unable to pay statutory liabilities such as provident fund (PF), sales tax, gst, employees’ state insurance (ESI), etc.;
- There are larger & long dues of bills accounts;
- The periodical financial data or stock statements are not getting submitted in time;
- The Working Capital Funds are used to finance capital expenditure;
- There is rapid turnover of key personnel;
- There are a large no. of law suits getting filed/pending against a company;
- The units are expanding rapidly and there is too much diversification in a short time;
- There are major changes in the share-holding pattern of the unit.
There could be more signals that can indicate the industrial sickness, although the above falls under the major and important signs & warn us that the unit/s might be in the process of getting sick.
REHABILITATION OF SICK MSE
Not only the units that have the above-mentioned signs but other viable or potentially viable MSE units or enterprises, that turn sick even after going through debt restructuring. All these sick units would need to be rehabilitated & has to be nursed.
GUIDELINES RELATING TO IDENTIFICATION OF A SICK UNIT, EARLY DETECTION OF INCIPIENT SICKNESS, & PROCEDURE TO BE ADOPTED BY BANKS BEFORE DECLARING A UNIT AS UNVIABLE
After the recommendations of RBI Working Group, RBI had revised the guidelines relating to sick unit identification, their early detection, and laying down procedure that need to be adopted by banks before the unit is declared as ‘unviable’:
- Handholding stage
- Definition of Sickness
- Reliefs and Concessions for Rehabilitation of Potentially Viable Units
- One-Time Settlement
HANDHOLDING STAGE: At the earliest, all the efforts to assist & rehabilitate the sick unit should begin on a proactive basis when early signs of sickness are detected. This is called the handholding stage.
Criteria for handholding stage:
- Delay of > 6 month to commence commercial production due for reasons that are beyond promoter’s control;
- Losses for 2 years or cash loss for 1 year
- Capacity utilization < 50% of the projected level (Qty)
the sales < 50% of the projected level (Value), during a year.
The handholding support should be undertaken within a period of 2 months (max) of its identification.
DEFINITION OF SICKNESS:
The Unit is said to have become Sick, if:
- Its loan remains NPA for 3 months or more
- There is erosion in net worth up to 50% of net worth during the previous accounting year due to accumulated losses.
The units that are outside the scope of revival even after intervention at the ‘handholding stage’ are to be classified as sick.
While becoming a sick unit is not under the hands of banks or FIs, it is for the banks/FI’s to decide whether the sick MSE is potentially viable or not.
The rehabilitation package has to be fully implemented by banks within 6 months from the date the unit gets declared ‘potentially viable/viable’. And in this 6-month period rehabilitation package, banks/FIs are required to do “holding operation” which allows the sick unit/s to draw funds from their CC A/C to the extent of their sale proceeds.
Ineligible units: Units that became sick due to willful mismanagement, willful default, disputes among partners or promoters, unauthorized diversion of funds, etc. must not to be classified as sick units.
Important Topic:- IIBF MSME STUDY MATERIAL 2021-2022
The decision on whether the unit is viable or not, should be taken within 3 months of the unit becoming sick. The procedure for determining the viability is as below:
- A unit should be declared unviable only after the viability study provides evidence of its viability status.
- For micro-manufacturing enterprises, (whose investment in P&M < / = Rs.5,00,000.00 &
microservice enterprises, (whose investment in equipment = /< Rs. 2,00,000.00,
the Bank Branch may take a decision on viability & record the same, along with the justification for the same.
- The declaration of the unit as ‘unviable’ should have next higher authority or present sanctioning authority approval for MSEs, after giving an opportunity of being heard to the unit’s promoters.
The above process should be completed in not later than 3 months. For sick units that have been declared unviable, having a loan of Rs.1 crore & above, a Committee approach may be adopted in those cases.
RELIEFS AND CONCESSIONS FOR REHABILITATION OF POTENTIALLY VIABLE UNITS:
Banks may decide what reliefs & concessions will be provided based on their own Board (Banks Board) approved policies.
The banks are required to place a non-discretionary One Time Settlement (OTS) scheme to recover non-performing loans for the MSE sector after they get duly approved by the Board of Directors of Banks.