Ch 38 Industrial Sickness

8/19/2019 Ch 38 Industrial Sickness

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Ch 38 Industrial Sickness

Presenter:Presenter:

Prof. Isha DaveProf. Isha Dave


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Denition of Sickness There are two ways of looking at insolvency:Stock!ased insolvency: "hen the r# has negative

net worth. i.e. assets are less than the lia!ilities

$low!ased insolvency: "hen o%erating cash &ows

are not enough to #eet its o!ligationsReserve bank of India has dened a sick unit as

'(ne which has incurred cash losses for one yearand) in the *udg#ent of nancing !ank) is likely toincur cash loses for the current as well as the

following year and or there is an i#!alance in theunit+s nancial structure) i.e. current ratio is lessthan , - de!teuity ratio is worsening.

Co#%iled !y: Prof. /a*see 0oshi


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Denition of Sickness The 1arsheny Co##ittee constituted !y the State 2ank

of India dened sick unit as 's a unit which fails togenerate internal sur%lus on a continuing !asis and isde%endent for its survival on freuent infusion of e4ternalfunds.+

$inancial Institutions for the %ur%ose of ter#loan) classifya sick unit after considering any of the followingsy#%to#s:

,.Default in #eeting 5 consecutive halfyearly install#entsof interest or %rinci%al of institutional loans

6.Cash losses for a %eriod of 6 years or continued erosion ofnet worth

3.Increasing arrears of statutory and other lia!ilities for a%eriod of , to 6 years.


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Causes of Sickness1. Unfavourable external environment Shortage of key in%uts like raw #aterials) %ower) etc

Changes in govern#ental %olicies

7#ergence of large ca%acity) leading to intense

co#%etition Develo%#ent of new technology

Sudden decline in orders

Shifts in consu#er %reference

atural cala#ities dverse international develo%#ents

/educed lending !y nancial institutions



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Causes of Sickness

2. Managerial decienciesDeciencies in Production

Deciencies in 9arketing

Deciencies in $inanceDeciencies in Personnel



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/2I Study of Causes ofSicknessStudy covered 38 units) on the causes of

industrial sickness revealed the following%icture:


Number Percentage

9is#anage#ent and #anagerialdeciencies

,;


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Sy#%to#s of SicknessDelay or default in %ay#ent to su%%liersIrregularity in !ank account

Delay or default in %ay#ent to !anks

$reuent reuests to !anks or $I for additional credits

Decline in ca%acity utiliAationPoor #aintenance of %lant - #achinery

=ow turnover of assets

ccu#ulation of inventories

Ina!ility to take trade discount74cessive turnover of %ersonnel

Decline in the %rice of euity shares - de!entures



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Prediction of SicknessBnivariate nalysis: "illia# 2eaver co#%ared nancial

ratios of a sa#%le of ; r#s that failed with thenancial ratios of a sa#%le of ; nonfailed for the sa#e%eriod of ti#e.

It suggests that nancial ratios had the %ower to signalan i#%ending failure.

=.C. u%ta) in an e4tensive study with Indian data)selected a sa#%le of 5, te4tile co#%anies of which 6@were sick and 6, were nonsick to test the %redictive

%ower of >3 nancial ratios. The study revealed that the 72DITSales and

(%eratingC$Sales are the two i#%ortant ratios which%redict sickness



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Prediction of Sickness9ultivariate nalysis: Seeks to %redict nancial

sickness using a #ethodology that considersthe co#!ined in&uence of various ratios.

Classic study was conducted !y 7.I lt#an.

lt#an+s E score #odel hel%s in !ankru%tcy%rediction.

Fe studied a sa#%le of 33 !ankru%t r#s alongwith a %aired sa#%le of 33 non!ankru%t r#s

and e4a#ined 66 nancial ratios with a view toselecting < which *ointly %ossessed the#a4i#u# %ower to %redict !ankru%tcy



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lt#an+s E Score original#odel T, H "orking Ca%ital Total ssets T6 H /etained 7arnings Total ssets

T3 H 7arnings 2efore Interest and Ta4es Total ssets

T5 H 9arket 1alue of 7uity Total =ia!ilities

T


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Critiue of 2ankru%tcyPrediction 9odels/esults of such unguided research eNorts

are often inconsistent) and i#%ossi!le togeneraliAe

These studies are statistically &awed!ecause they are retros%ective in nature



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/evival of a Sick Bnit

Ste% ,. 1ia!ility Study:9arket nalysis

ProductionTechnical nalysis

$inancial nalysisPersonnel (rganiAation

7nviron#ent



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Ste% 6. /evival Progra##eSettle#ent with creditors

Provision of additional ca%ital

Divest#ent - dis%osal

/efor#ulation of %roduct#arket strategy

9oderniAation of %lant - #achinery

/eduction in #an%ower

Strict control over costs

Strea#lining of o%eration

I#%rove#ent in #anagerial syste#s

Change of #anage#ent



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De!t /estructuringInterest rate relief

Defer#ent of %ast interest dues

"aiver of %enalties/eschedule#ent of loan re%ay#ent

/eduction in loan a#ount



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Turnaround Stories

$%& &u'ukiStarted its o%erations in ,;;;8

Its %erfor#ance deteriorated in the followingthree years

2y early ,;;, situation was really !ad !ecauseof intense co#%etition

Deter#ined to ght the co#%etition and i#%rove%erfor#ance) co#%any took a series of ste%s:

,. si4 #onth) week!yweek cost reduction drivefocused on raw #aterial cost) #an%ower cost)etc. This led to a dro% of 3@O in o%erating costs



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Turnaround Stories

6. 9assive e4ercise in value engineering wasundertaken in tande# with SuAuki. This resultedin a saving of ,@ #illion %er #onth.

3. %roduct i#%rove#ent strategy to introduce a

new #odel every few years) to !uild #arketshare

5. renewed #arketing drive !acked u% !y a highadvertising outlay and a new #arketing andvendor %olicy

Due to these initiatives and the dyna#icleadershi% of 1enu Shrinivasan) the co#%anye#erged as a healthy) vi!rant organiAation



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Thank ou


Documents

Ch 38 Industrial Sickness