Unit – 3

Management of MSMEs and Sick Enterprises, Challenges of

MSMEs , Preventing Sickness in Enterprises – Specific
Management Problems; Industrial Sickness; Industrial
Sickness in India – Symptoms, process and Rehabilitation of
Sick
Micro, Small and Medium Enterprises (MSMEs) sector has emerged as a highly vibrant and dynamic
sector of the Indian economy over the last five decades. MSMEs not only play a crucial role in providing large
employment opportunities at comparatively lower capital cost than large industries but also help in
industrialization of rural and backward areas. MSMEs reduce regional imbalances, assuring more equitable
distribution of national income and wealth. MSMEs are complementary to large industries as ancillary units and
this sector contributes enormously to the socioeconomic development of the country.
❖ Globally, Micro, Small and Medium Enterprises (MSMEs) play a vital role in the economic development of
a nation. MSMEs are the nursery where small existing businesses have the potential to become Global
Enterprises.
❖ The MSME sector has emerged as a dynamic sector of the Indian economy over the last five decades.
MSMEs contribute enormously to the socio-economic development of the country. MSME have a large
share of jobs, production and exports. The primary responsibility of promotion and development of MSMEs
is of the State Governments. However, the Government of India, supplements the efforts of the State
Governments through various initiatives.
The Government of India has introduced MSME or Micro, Small, and Medium Enterprises in agreement with Micro,
Small and Medium Enterprises Development (MSMED) Act of 2006. These enterprises primarily engaged in the
production, manufacturing, processing, or preservation of goods and commodities.
What are Micro Units
Earlier the criteria was solely on an investment basis. Like:
1. An investment up to Rs 10 lakh for service units
2. An investment up to Rs 25 lakh for manufacturing units.
New Definition of Micro Units: An MSMEs will now be called a micro-unit if up to one crore, it can be proprietor own
money or through MSME business loan, has been invested into it and it has a turnover of less than Rs 5 crore. Unlike
earlier now these two aforesaid factors will define a micro unit.
New Definition of Small units: As for the small units, the investment limit has been doubled from the earlier rupees 5
crore to rupees 10 crore, now besides that it must have a turnover of less than 50 crore. This new definition encompasses
all MSMEs, service enterprises included, earlier service enterprises were under-investment of up to Rs 2 crore category.
New Definition of Medium units: An enterprise that has an investment up to Rs 20 crore along with a turnover of less
than Rs 100 crore will now be called a medium unit. Whereas earlier, the investment limit for a medium unit was up to
Rs 10 crore and for Service enterprises, the limit was up to Rs 5 crore.
(i) a micro enterprise, where the investment in Plant and Machinery or Equipment does not exceed one crore
rupees and turnover does not exceed five crore rupees;
(ii) a small enterprise, where the investment in Plant and Machinery or Equipment does not exceed ten crore rupees
and turnover does not exceed fifty crore rupees;
(iii)a medium enterprise, where the investment in Plant and Machinery or Equipment does not exceed fifty crore
rupees and turnover does not exceed two hundred and fifty crore rupees.
MSMEs have the inherent characteristics of being innovative and quickly responsive to changing market conditions.
And it is because of these qualities, SMEs contribute substantially to any economy and are widely acknowledged as
the engine of economic growth.
The important characteristics of MSMEs are summarized as follows:
➢ They are generally organized and run by individual entrepreneurs.
➢ They require less capital.
➢ They are fundamentally labour-intensive units facilitating greater utilization of manpower.
➢ They involve the use of simple technology, intensive utilization of individual skill leading to professional
specialization.
➢ They cater the individual tastes and fashions and render personalized service to consumers.
➢ They are highly localized industries. Using local resources MSMEs are decentralized and dispersed to rural areas.
➢ They are eligible for govt. assistance and patronage and for concessional finance by banks, financial institutions
etc.
➢ They are flexible to a large extent. They are more susceptible to change and highly reactive and receptive to
socio-economic conditions.
➢ They are free from redtapism and bureaucratic handicaps.
➢ Compared to large units, a MSME has a lesser gestation period. ie, the period after which the on investment
starts.
Importance of MSME
MSME has introduced in the year 2006 in India. There are still some service sector that was not yet included in this sector
was included in the definition of the Micro, Small and Medium-sized Enterprises making a historic change to this Act.
Therefore, leveraging the scope of the sector even now government simplified the MSME Registration online with the
paperless work.
The further Importance of MSME in India has been described below:
1.It creates large-scale employment: Enterprises that are inclusive in this sector require low capital to start up new
business. Moreover, it creates a vast opportunity for the unemployed people to avail. India produces about 1.2 million
graduates per year out of which the total number of engineers are around 0.8 million. There is no economy so far that could
provide that large number of freshers in one year only. MSME is the boon for the fresh talent in India.
2.Economic stability in terms of Growth and leverage Exports: It is the most significant driver in India contributing to
the tune of 8% to GDP. Considering the contribution of MSME to manufacturing, exports, and employment, other sectors
are also benefitting from it. Nowadays, MNCs are buying semi-finished, and auxiliary products from small enterprises, for
example, buying of clutches and brakes by automobile companies. It is helpful in creating a linkage between MSME and
big companies even after the implementation of the GST 40% MSME sector also applied GST Registration that plays an
important role to increase the government revenue by 11%
3. Encourages Inclusive Growth: The inclusive growth is at the top of the agenda of Ministry for Medium, and small
and Medium-sized enterprises for several years. On the other hand, poverty and deprivation are a deterrent to the
development of India. Besides, it includes marginalized sections of a society which is a key challenge lying before the
Ministry of MSME.
4. Cheap Labor and minimum overhead: While in the large-scale organizations, one of the main challenge is to
retain the human resource through an effective human resource management professional manager. But, when it comes
to MSME, the requirement of labor is less and it does not need a highly skilled laborer. Therefore, the indirect expenses
incurred by the owner is also low.
5. Simple Management Structure for Enterprises: MSME can start with limited resources within the control of the
owner. From this decision making gets easy and efficient. On the contrary, a large corporation requires a specialist for
every departmental functioning as it has a complex organizational structure. Whereas a small enterprise does not need
to hire an external specialist for its management. The owner can manage himself. Hence, it could run single-handedly.
6. The main role in the mission of “Make in India”: The signature initiative by the Prime Minister of India “Make in
India” has been made easy with MSME. It is taken as a backbone in making this dream a possibility. In addition, the
government has directed the financial institution to lend more credit to enterprises in the MSME sector.
There are various reasons due to which the small-scale business in India has witnessed a spurt of growth.
Some of these factors are:
➢ Less Capital Intensive
➢ Extensive Promotion & Support by Government
➢ Reservation for Exclusive Manufacture by small scale sector
➢ Project Profiles
➢ Funding - Finance & Subsidies
➢ Machinery Procurement
➢ Raw Material Procurement
➢ Manpower Training and technical & Managerial skills, Tooling & Testing support
➢ Reservation for Exclusive Purchase by Government
➢ Export Promotion and Growth in demand in the domestic market size due to overall economic growth
➢ Increasing Export Potential for Indian products
➢ Growth in Requirements for ancillary units due to the increase in number of Greenfield units coming up in the
large-scale sector.
Although Indian MSMEs are a diverse and heterogeneous group, they face some common problems, which are
as under :
1. Lack of availability of adequate and timely credit. The major dependence for some sectors (eg. handicrafts) is for
larger working capital requirement, which directly impacts their production cycle
2. High cost of credit
3. Collateral requirements being insisted upon by banks
4. Limited access to equity capital for MSMEs
5. Marketing is one of the critical areas where MSMEs face problems including product differentiation, brand
building, customized tailor-made services, clientele building, after sales servicing etc.
6. Many entrepreneurs are not entering in the field of exports due to lack of market knowledge, availability of a
growing domestic market, and the complexities of international trade.
7. Limited scale of operations leads to low production capacity (and consequent low exportable surplus), which is
related to the maximum limits for capital investment for definition of MSME
8. Problems of designing, packaging and product display due to limited capacities Inadequate infrastructure
facilities, including power, water, roads, etc.
9. Low technology levels and lack of access to modern technology.
10. Lack of skilled manpower
11. Absence of a suitable mechanism which enables the quick revival of viable sick enterprises and allows unviable
entities to close down speedily.
12. Lack of coordination among the various organizations involved in the promotion of MSMEs, including
organizations of the State Governments, and poor linkages with the institutional stakeholders in the private sector.
There is also duplication of programs run by various Ministries for the same target group
13. Lack of reliable and updated data base to help in monitoring the development initiatives and formulation of
appropriate schemes to meet the differential needs of the heterogeneous beneficiaries.
14. Non availability of raw materials at a competitive cost, very often due to low volumes
15. High transaction costs and procedural delays leading to high fixed costs.
16. Policy and procedural issues.
17. Governance Issues.
In nutshell, the major problems for the MSMEs relate to the availability and cost of credit, marketing support,
improving productivity, technology/skill upgradation, infrastructure and the institutional framework for the MSMEs
 Challenges of MSMEs
For Indian MSMEs as well, the pandemic was such a major blow that the sector has still not recovered from its
impact. However, no matter how harsh the situation may be, there is always a silver lining. The pandemic
highlighted some deep prevailing issues with the Indian MSME sector. Some of these key challenges faced by
MSMEs in India are:
1. Poor Ease of Doing Business Environment for Entrepreneurs
In India, one need to have 45 documents to start a restaurant, but only 19 to get an arms license. Well, the example
itself explains the scenario for entrepreneurs. A poor business environment for startups is one of the
major challenges faced by MSMEs in India. This is majorly due to numerous regulations, complex procedures, and
bureaucratic redtapism. These factors in turn throttle the aspirations of those who plan to start an enterprise. But, it
isn’t all doom and gloom as India has steadily climbed up its rank in the World Bank’s Ease of Doing Business
Index. While in 2012, we stood at the 131st mark, India ranked at 63rd in the 2021 EODB Index. But still, there
exists a dire need to simplify contract enforcement, permits, tax payments, property registration, and insolvency
resolution.
2. Indian MSMEs are lagging on the technological front
One major reason why rival firms outperform Indian MSMEs is the lack of advanced technology. As Indian
MSMEs fail to exploit the technological benefits; a lower consumer demand has become as customers switch to
better options. So, the need to introduce new-age technology and implement technology transfer across the sector is
the need of the hour. Moreover, India needs more focus and financial investment in research and development.
Besides, enhanced collaboration between the scientific community and MSME clusters is imperative to establish a
technological sound and digital MSMEs base. MSMEs and the digital economy should go hand in hand to ensure
the synchronization between the two. By introducing automation, MSMEs can also engage in exporting new
products further leading to cost competitiveness. Needless to say, technology adoption is a must for Indian MSMEs
to thrive lest global competition will render them outdated.
3. Scant Infrastructural Facilities
A good infrastructure base is a prerequisite for the success of any business. But Indian MSMEs are grappling with
extremely insufficient infrastructure. By eliminating the infrastructural gaps in domains such as electricity
connection, regular supply, and capital goods availability; the output and resilience of Indian MSMEs can be
strengthened.
4. Financial backwardness remains a major deterrent
The financial backwardness in Indian MSMEs is a three-fold issue that encompasses: lack of financial knowledge, liquidity
crunch, and a high cost of credit.
Financial literacy among the Indian MSME sector is still quite low. The knowledge of finances and market trends is extremely
necessary for entrepreneurs to bring good output and expand their operations. Moreover, to tide over the crisis waves,
entrepreneurs need to have an in-depth understanding of various MSME loan schemes and economic know-how.
Secondly, MSMEs (especially in remote areas) struggle with perennial liquidity crunches due to various reasons, such as:
1.Lack of knowledge about available loans and schemes
2.Low penetration of banking sector in rural and remote areas
3.Regulatory loopholes and delay in loans
Due to lack of access to finance at the time of need, most MSMEs resort to moneylenders. Debt trap is one of the
biggest problems of MSMEs in India. Moreover; lack of timely finance also hampers timely purchase of raw material,
acquisition of skilled manpower, and access to advanced technological tools. The crunch was much evident during the pandemic
when MSMEs faced the worst hit due to lack of adequate financial solutions and rising NPAs.
Thirdly, a high cost of credit is the major spoilsport hindering the MSME sector from performing at its full potential. Poor credit
availability coupled with unreasonably high credit costs throttles Indian MSMEs aspirations to innovate, acquire and expand
5. Working Capital Shortage
As lockdown restrictions ease up, MSMEs now stare at a grave shortage of financial and human capital.
The enormous labour shortage especially due to the migration crisis is a major problem of MSMEs. It has been obstructing the
recovery of the MSME sector post-pandemic. In addition, lack of skilled and trained manpower is another issue that needs to
be addressed by providing on-work training and encouraging skill acquisition. The complexities related to poor industrial
linkages and labour laws are added issues to the miseries of the MSME sector.
6. Outdated Practices and Knowledge Base
To keep up with the market trends, businesses need to be up-to-date with upcoming managerial, marketing, sales, and
entrepreneurial skills. However, a lot needs to be done in this sphere to bring MSMEs in line with modern practices. The
potential of our MSME sector remains untapped in this domain due to:
1.Lack of education and awareness of market trends
2.Poor knowledge of marketing strategies
3.Absence of market analysis and target audience identification skills
4.Little or no professional perception of distribution, branding, production, and packaging
5.Limited professional exposure to product development and promotion practices
Indian MSMEs need to be re-equipped with relevant marketing techniques to take their customer game to the next level.
Managing Challenges of MSMEs :Keep reading as we outline the most common challenges MSMEs in India face.
1. Finance-Related Challenges: One of the biggest challenges that MSMEs face in India is the lack of finance. We
see, one of the significant reasons behind financial challenges is the lack of financial literacy. The majority of
MSME owners are from education-deprived and poverty-hit regions.
❖ Thus, they are unaware of the special financial privileges given to them by the government. This carelessness
causes them to make some impractical financial decisions, leading to financial crises.
❖ Apart from this, India’s MSME sector usually does not enjoy the same creditworthiness as other big shot
companies. It might be due to two reasons. First, MSME owners usually do not have any asset in their name.
❖ Second, the banks are unsure about their repayment capabilities. Lack of finance options, lack of liquidity, long
paperwork, and approval process rob their chances of capitalising on real-time business opportunities.
➢ Solution – MSME owners should invest some time in getting acquainted with the latest schemes and policies of
the government.
➢ Apart from this, many private and public sector banks have also come forward to offer financial help to MSMEs.
The majority of them are giving business loans to small, medium, and micro-entrepreneurs.
2. Marketing and Managerial-Related Challenges: The lack of managerial, entrepreneurial, and marketing skills is
taking a toll on the growth of the MSME sector. We all know the relevance of the right marketing strategies to boost
sales and acquire new customers. But the lack of professionalism and structured top management is making it
impossible for the enterprises to step into the competition.
❖ Moreover, lack of education, knowledge of market trends, consumer preferences, and access to advanced
technology has also acted as a bottleneck in the development of this sector. Apart from this, ineffective marketing
strategies, the absence of market analysis, and identification of the target audience are also a challenge for MSMEs
in India.
❖ Constraints on expansion and modernisation, improper product development, and poor product promotion are
pulling back MSMEs out of the competition. As far as management is concerned, MSMEs hardly get any
professional exposure to management practices in marketing, distribution, branding, or production. Above all, the
continuous entry of private players in the market is taking the competition to another level.
➢ Solution – MSME owners should take the initiative to improve their stand in the competition.
➢ They should also connect with a professional to refine their marketing skills, pricing policies, and network.
➢ The government has also launched several exclusive schemes like DMP, EMP, and MCY, to promote the sale of
domestic goods.
3. Labour-Related Challenges: Skilled manpower is the backbone of a successful manufacturing enterprise.
Unfortunately, MSMEs face a lot of inconsistencies when it comes to skilled manpower and labour law
compliances. Moreover, the non-availability of a skilled workforce at an affordable cost is adding to the woes of the
MSME sector.
❖ Poor employee management and improper training and development facilities is also a big issue in India. The
local labour markets are quite rigid, making it impossible for the MSMEs to function smoothly. Many companies
also complain of poor industrial relationships and lack of manpower planning.
➢ Solution –MSMEs should make efforts to organise things at their end. The entrepreneurs should also try to offer
higher wages to the workers.
➢ On-the-job training will boost the productivity and morale of the employees.
➢ On the other hand, the government should also simplify labour laws in the country.
➢ The constitution of structured trade unions will also help in safeguarding the rights of the employees.
4. Technology-Related Challenges: When it comes to technology, the MSME sector is quite behind in the race.
Limited access to IT education, knowledge, and information is restricting the growth of this sector. This challenge has
created a huge backlog of unfilled returns, payments, and orders.
❖ Lack of education can also be blamed for this issue. Apart from this, MSME owners cannot afford to buy and use
expensive technical equipment. Even if they do so, the workforce is not qualified enough to operate advanced
machinery. The result is, they are still using outdated machinery and methods of production.
❖ The result is slower production processes and compromised product quality. One more issue that comes in the way
of MSME development is the lack of online safety and security. Enterprises hardly invest in these measures and
end up compromising their privacy and data.
❖ Solution –
➢ MSME owners should enrol themselves in government IT development programs. It will help them in
understanding the latest technological developments in their sector. It will also increase their access to modern
technology.
➢ The Indian government should also encourage the MSME owners by opening IT centres in rural and
underdeveloped areas.
5. Competition-Related Challenges: It is another challenge that micro, small, and medium enterprises in India are
facing right now. You see, a business has to fulfil the needs and exceed the expectations of its consumers to thrive in
the competition. And any business that is not progressing with time will move backwards over time.
❖ As far as marketing and advertising are concerned, MSMEs still follow the traditional methods. They are not
adopting innovative marketing channels. Moreover, their sales promotion and advertising are quite weaker than
those of multinational companies. Poor marketing channels and ineffective advertising leads to very low sales in
MSMEs.
➢ Solution – MSMEs must be open to welcome changes in business strategies according to the feedback of the
consumers.
➢ They should also try to identify and analyze the causes of their low sales. Using versatile modes to promote
products and services will prove to be a masterstroke for this sector.
➢ Excellent customer service and high-quality products at affordable rates are the secrets to success in this industry.
➢ The government, on the other hand, should also motivate MSMEs by promoting domestic products in the market.
 Sick Enterprises - Preventing Sickness in Enterprises
❖ The problem of industrial sickness is nothing peculiar to our economy or any developing country. It is also
present in the advanced countries, hut there it is considered prudent to shut down the units if they are sick.
❖ But in developing countries, like India, one cannot afford to do so as it will lead to substantial block of
national capital to go waste and create unemployment of those already employed, when additional
employment is a crying need of the hour.
❖ Even ‘not so fit’ or ‘unfit’ industries may have to be rendered a helping hand to raise and stand on their own, to
avoid wastage or total loss of funds and other resources already invested therein.
An industrial unit will be termed as “weak,” if at the end of any accounting year it has:
(i) Accumulated losses equal to or exceeding 50 per cent of its peak net worth in the immediately
preceding five accounting years,
(ii) A current ratio of less than 1:1,
(iii) Suffered a cash loss in the immediately preceding accounting year.
Definitions of Sickness Enterprises
❖ A sick industrial unit/ enterprise may be defined as one where it fails to generate surplus on a continuous
basis and depends upon frequent infusion of external funds for its survival. According Reserve Bank of
India (RBI), a small-scale unit should be considered as sick if it has at the end of any accounting year,
accumulated losses equal to or exceeding 50% of its peak net worth in the immediately preceding 5
accounting years.
❖ Industrial Sickness – Special Provisions Act, 1985, The government defined industrial sickness for the first
time in the Sick Industrial Companies (Special Provisions) Act, 1985.
According to this Act, a medium or large (i.e. non-SSI) company was defined as sick if:
(1) it was registered for at least 7 years (later reduced to 5 years)
(2) it incurred cash losses in the current year and the preceding year.
(3) its entire net worth (i.e. paid-up capital and reserves) was eroded.
A company is regarded, as weak or incipiently sick on the erosion of 50% of its peak net worth during any of
the preceding five financial years.
Industrial sickness has been redefined in the Companies (Second Amendment) Act, 2002.
Incipient Sickness: If the downfall in the smooth functioning of various operational areas of the unit continues
unabated. The actual process of sickness then starts.
Such a stage is considered to be incipient sickness and is identified by reference to the following symptoms:
(1) There are continuous such losses from year to year and the trend is expected to continue in future.
(2) Deterioration is expected in the current ratio in the current financial year, even though the same may have been
more than one in the previous financial year.
(3) There is gradual erosion in the net worth during the previous and current financial year and is expected to
continue in future also.
(4) Deterioration continues in the debt-equity position in the current financial year and subsequently also.
➢ In a nutshell, it may be seen that incipient industrial sickness is that stage where the unit incurs cash losses;
however, the position of financial structure may not be very much alarming.
➢ This is the time to take certain corrective measures to prevent the unit from turning into sickness. This will,
however, require proper identification, care and follow-up programme.
Industrial Sickness – Signals of Industrial Sickness
The sign of sickness may be discernable at quite an early stage. This warning sign is termed as “Signal”. In fact, the
timely identification of various signals makes the detection of sickness easier. Therefore, the various signals as listed
below need to be identified and monitored at an early stage.
The important signals of sickness are:
1. Decline in capacity utilization
2. Irregularity in maintaining bank account
3. Non-submission of the data to bank financial institutions
4. Inventories in excessive quantities
5. Frequent break down in plant/ equipments
6. Decline in technical deficiency
7. Decline in the quality of the products/services
8. Shortage of liquid funds for short-term financial obligations
9. Default in the payment of statutory dues
10. Frequent turnover of personnel in the industries.
11) Inappropriate utilization of resources.
12) Rejection rate of goods manufactured is very high.
13) Overuse of cash credit facilities on a regular basis and failing to pay installment on credits and interest on loans
taken from banks and other financial institutions
14) Constant inconsistency prevailing in cash, credit accounts.
15) Failure to pay statutory liabilities.
16) Employing working capital fund.s for financing capital expenditure
17) Continuous loss of profits, fluctuations or downward trends in sales and stagnation followed by downfall in the
market share.
18) Longer and larger outstanding bills.
19) Diverging industrial funds and employing it to other purposes which may not relate to industry.
20) A major decline in the market causing failure of all the units engaged in this industry.
21) Conducting quick expansion activities and too much diversification with a short interval of time.
22) Several law suits pending against the firm.
23) Frequent changes made in the management of the industry including professional or an individual authority.
24) Failure to submit periodical financial data, stock statement, etc.
25) Constant decrease in the working capital of industry majorly caused due to : Increase in inventories involving
substantial amount of slow and non-moving items. Increasing number of creditors. Increasing number of debtors
(non-payment of sales proceeds from the side of selling agents).
Industrial Sickness – Reasons and their Consequences of Sickness Reasons:
It cannot be attributed to a single factor alone. In fact, it is cumulative effect of many factors interrelated
/independent of each other.
The main reasons for the sickness can be categoried as:
1. External or Exogenous causes
2. Internal or Endogenous causes
1. Exogenous Causes:
There may be several exogenous factors causing a unit sick. It may vary from time to time for industry to industry
and/or even one time to other or the same industry.
The important external reasons may be:
(i) Shortage of financial resources
(ii) Labour unrest/strike
(iii) Lack of demands of the product
(iv) Change in industrial policy
(v) Poor inventory maintenance
(vi) Untimely supply of/purchase of raw materials
(vii) Natural calamities like food, earthquake, drought etc.
(viii) Recessionary trends hovering the industry.
All the above factors can be broadly classified as:
(i) Governmental policy
(ii) Natural calamities
(iii) Environmental conditions
2. Endogenous Reasons: These are mainly due to some internal deficiencies in several functional areas, viz.
personnel, production, marketing, management and/or finance. Majority of the projects (54%) are found to be sick
due to internal reasons like poor management, labour problems, operative problems, poor implementation and /or
lack of sufficient working capital.
This type of sickness may occur at every stage as:
❖ First Stage: It happens during planning and construction stage. The unit may be located at an uneconomical
location, adopted an inefficient method of production and/or planned to produce an obsolete item.
❖ Second stage: Unit might have committed some mistakes during recruitment, training of the workers,
unestimation of various inputs (fund, labour, power, water etc.). It cannot be corrected easily at late hours.
❖ Third Stage: It may arise even if the unit is in full swing. It may be due to demand of product which might have
changed. New technologies might have taken place and/or new or more competitors have entered in the market.
Studies show that small scale units are mainly sick due to exogenous causes, whereas endogenous causes play
important role in making large units sick.
Small units are so small that they cannot withstand fluctuation in the market, frequent change in government policy
and/or market policies. They work with very small margin of profit and as such even small error may make them
sick. Due to this, small units are highly prone to sickness.
Major causes for industrial sickness in India are as follows: The reasons for industrial sickness in India can be
divided into two categories:
1.Internal causes – which includes
1. Faults at the initial levels of planning and construction.
2. Financial constraints.
3. Labour and management problems.
4. Defective, inefficient, and age-old machinery.
5. Incompetence on the parts of entrepreneurs.
6. Unskilled laborers to work with modern technology.
2.External causes are those which are beyond the control of its management and include –
1. Sudden changes in government policies.
2. Erratic supply of inputs.
3. Non-availability of energy resources and raw materials.
4. Increased competition.
5. Power cuts.
6. Demand and credit restraints.
7. Delay on the part of the Government in sanctioning licenses, permits, etc.
Specific Management Problem :Another reason for the industrial sickness is ineffective or bad corporate
management which includes:
1. Improper corporate planning
2. Poor Inventory Management
3. Lack of Integrity in top Management
4. Lack of coordination and control
5. Poor implementation of Projects etc.
6. Improper Choice of Technology: Small enterprises cannot afford to take technical guidance from expert in
choosing proper machinery. An improper choice of technology, unsuitable product mix and single product technology
contribute to industrial sickness.
7. Mismanagement : Industrial sickness could be because of mismanagement in various functional areas like finance,
production, Marketing and personnel resulting from wrong management decision.
8. Incompetent Entrepreneurs :Lack of knowledge about market, customers, costing, marketing ,accounts, finance
etc. could also leads to industrial sickness.
9. Bad Production Policy :Another important reason for sickness could be wrong production policies like:
➢ Wrong selection of product location
➢ Defective selection of Plant & Machinery
➢ Bad maintenance of Plant & Machinery
➢ Overestimation of demand
➢ Lack of quality control
➢ Lack of standard Research & Development and so on.

10. Increase in cost due to delay in implementation of project : Major project have to be implemented in time .Time is
money .Any delay causes problem of lost business. it will be reason for loss. Especially the project of big size have to be
planned properly. The supply of money and the schedules of the payment are to be carefully done.
Industrial Sickness – Prevention of Sickness: Units falling sick have been studied extensively. Some
units are born sick, some units are made sick, and in case of some units, sickness is thrust up on them. Four groups
can play a dominant role in preventing units from falling sick.
1. Term Lending Institutions: If the term lending institutions take the following steps, sickness can be
prevented:
i. Proper appraisal of management of the project
ii. Ascertaining the marketability of the end products of the unit before lending
iii. Extra care in assessing the suitability, technical feasibility of plant and machinery if it is second-hand one
iv. Ensuring the timely implementation of the project.
2. Commercial Banks: Since the commercial banks are the ones providing resources for serving successfully,
they have to take the following steps to prevent sickness:
i. Noticing that the withdrawals in the account do not exceed the permissible drawing power continuously over a
period of time
ii. Frequent scrutiny of the ledger account with the master intelligences
iii. Frequent interaction with the entrepreneur
3. The Entrepreneur: The successful running of the unit surely depends on the ability and sustainable effort of the
entrepreneur. It is the entrepreneur who conceives, implements, and manages the project to avert sickness in the unit.
They can prevent sickness by:
i. Selecting the supplier of the machinery with care
ii. Doing the homework properly
iii. Paying adequate attention to the deficiencies in the unit
iv. Careful selection of the partners.
4. The Government: The Government too can help in controlling sickness by not making sudden changes in the
industrial policy such as – the following, which may destabilize the small units:
i. Several changes related to existing units
ii. Policy to discourage new investment
iii. Withdrawal of subsidies
iv. Opening up of reserved items for big industries.
5) Effective Planning : It is essential for every small and medium sized enterprise to conduct in-depth survey of
prevailing circumstances in small scale sector and productive programs. Only a small number of entrepreneurs initiate
their operations based on an accurate and diligent plan. Thus, effective planning is essential as all small entrepreneurs
require a detailed project report or an all-inclusive feasibility study to start their units. Absence of such a planning can
affect entrepreneurs with issues like inappropriate technology, under-estimation of costs, unsuitable location,
unqualified or inexpert consultancy service, etc. Hence, it is indispensable for SMEs to launch effective action plans
for their sustenance.
6) Improvement in Techniques of Production and Proper Technology : With the advent of technological
advancements, firms must attempt. to upgrade their process of production. They must adopt the latest technology for
producing goods/ services. Under the following circumstances, government consultancy organization's and
laboratories play a crucial role. As small firms are incompetent to spend money on the latest technologies,
government should arrange practical and modern methods of production for them. If financially possible, firms should
also invest in their research and development activities. They should always strive for constant innovation for leading
the market and sustaining in globalized business environment.
7) Training and Development : Industries must make coordinated efforts in bestowing formal training and education to workers
involved in this sector as they are the real profitable asset of the industry. Firms should consider the expenses incurred on training
and educational activities as investments for ensuring long-term of the growth business. Expertise and skills essential in the
dynamic business environment should be provided by the Small Industries Association. Further, in order to compete with medium
and large-scale competitors, small firms should motivate their workers by providing motivation and offering rewards.
8) Provision of Infrastructural Facilities : Firms require many important facilities to ensure smooth. functioning of its
operations such as finance,, water supply, power arrangement, etc. These facilities are extended by small industries corporation.
State technical consultancy organizations and State Development Corporation. However, their support system requires more
improvement. Evolution of industrial estates has resolved this problem partly; yet more efforts are necessary to establish more
industrial estates to accommodate more small units.
9) Regular Supply of Raw Materials : Small-scale sectors get regular supply of raw materials by Small Industries Development
Corporations and other canalizing agencies. These agencies should undertake requisite actions for maintaining a steady, but proper
supply of raw materials to small and medium sized enterprises. Government should also take a hand on a regular basis in arranging
economical and affordable imports of raw materials. Firms on the other hand, should maintain regular procurement of raw
materials for avoiding industrial sickness.
10) Adequate Credit Arrangement : For avoiding industrial sickness, firms and industries should arrange adequate
credit for running their business efficiently. There are many small and medium sized firms which are incompetent to
obtain proper financial support from banks and other funding agencies, they primarily depend more on owned funds
and funds borrowed from nonbanking sector. However, SEBI has devised guidelines and directives for venture
capital and better finance facility is expected for this sector. Moreover, lending schemes offered by priority sector
should be made more wide-ranging and general credit with improved limit.
11) Effective Marketing Arrangements :
Every firm must emphasize on their market, brand and product development. They must strive to persist in the
market by paying exceptional significance on quality enhancement programme. Offering products at cheaper rates
and transmitting the benefits to consumers would be advantageous in the long-run to raise their marketing
performance. Marketing the products of small units by charging a very high price from the customers enables large
companies to earn substantial profits. Thus, firms should adopt effective marketing strategies to overcome industrial
sickness.
To enable MSMEs to be competitive in domestic and global market, a few recommendations are given below to
overcome the problems.
1. Providing credit to the MSMEs at base rate and devise a strategy for cost effective finance and improve the
delivery points for credit to MSMEs in tens of quantity and quality.
2. Providing better infrastructure facilities like roads, rail, ports, airports, water, sewage and power should be
ensured.
3. Enhancing skill among the work force to meet industry requirements.
4. Relaxing complex labour laws for better compliance.
5. Suggesting measures to prevent industrial sickness and revival of viable sick units.
6. Adopting total quality management and ISO standards in MSMEs units.
7. Promoting quality competitiveness and research and development for strengthening the MSMEs units.
8. Treating the employees of MSMEs as an asset and give them recognition with an eye towards the need to
improve their skill.
Reliefs and Concessions for Rehabilitation of Potentially Viable Units
i. Interest Dues on Cash Credit and Term Loan - The Bank may waive penal interest of the unit from the
date when it started incurring cash losses continuously. After this is done, the unpaid interest on term
loans and cash credit during this period should be segregated from the total liability and funded as Funded
Interest Term Loan (FITL).
❖ No interest may be charged on funded interest and repayment of such funded interest should be made
within a period not exceeding three years from the date of commencement of implementation of the
rehabilitation program.
ii. Unadjusted Interest Dues - Unadjusted interest dues such as interest charged between the date up to which
rehabilitation package was prepared and the date from which actually implemented, may also be funded on the
same terms as at (i) above.
iii. Term Loans - The rate of interest on term loans may be reduced, where considered necessary, by not more
than three (3) per cent in the case of tiny/decentralized sector units and by not more than two per cent for other
MSME units, below the documented rate.
iv. Working Capital Term Loan (WCTL) -
After the unadjusted interest portion of the cash credit account is segregated as indicated at (i) and (ii) above, the
balance representing principal dues may be treated as irregular to the extent it exceeds drawing power. This amount
may be funded as Working Capital Term Loan (WCTL) with a repayment schedule not exceeding 5 years. The rate of
interest applicable may be 1.5 % to 3% points below the prevailing interest rate for the borrower. This rate can be
below Base Rate as per prevailing RBI guidelines. However, such concessions should not be extended as a matter of
rule and should be need based linked to the viability of the unit.
v. Cash Losses -
Cash losses are likely to be incurred in the initial stages of the rehabilitation program till the unit reaches the
breakeven level. Such cash losses excluding interest as may be incurred during the rehabilitation program may also be
financed by the Bank and the Financial Institution, if only one of them is the financier. But if both are involved in the
rehabilitation package, the financial institution concerned should finance such cash losses. Interest may be charged on
the funded amount at the rates prescribed by SIDBI under its scheme for rehabilitation assistance.
vi. Working Capital -
Interest on working capital may be charged at 1.5% below the prevailing fixed / floating rates wherever applicable.
Additional working capital limits may be extended at a rate determined as per the viability of the unit to repay.
vii. Contingency Loan Assistance -
For meeting escalations in capital expenditure, Bank may provide financial assistance at concessional rate up to
15% of the estimated cost of rehabilitation or Bank may advise the borrower to bring additional capital. viii. Funds
for Start-up Expenses and Margin for Working Capital - Where a financial institution is not involved, Bank may
provide the loan for start-up expenses, while margin money assistance may either come from SIDBI under its
Refinance Scheme for Rehabilitation or should be provided by State Government where it is operating a Margin
Money Scheme.
Viii. One Time Settlement The Bank has prepared a separate One Time Settlement Scheme for recovery of NPA in
MSE sector. The details are separately covered and placed before the Board.
Ix. Delegation of Powers The Rehabilitation powers will be exercised, as per the authority matrix for sanctioning
proposals laid down in Credit Policy but must have the recommendation of Head Recovery and additionally
recommendations of Head Special Assets Group in case of Standard assets.