Mohammad Masoom
Industrial sickness is an offshoot of modern industrial civilization. An industry becomes sick when it loses the capacity to survive in the face of fierce competition and other financial and nonfinancial constraints. Social advancement is attained by the constant revolutionization of technical forces of production by new discoveries of processes, methods and technologies. It should be an overriding concern to salvage/ revive the sick industrial units only when it is found feasible and possible through proper study and application of due diligence. Liquidation should be the last choice when turning unviable industrial enterprises into the viable ones found to be useless. Conceptually sick industrial company implies an undertaking /enterprise having at the end of any year accumulated whopping losses equal to or exceeding its entire net worth that is the state of condition when the net worth stands eroded.
Indicators of Sickness: There will be persistent demand for fund from the client's end rendering account transaction irregular. The natural result will be a
1. Delays in receiving inward bills/mounting arrears of maturing dues.
2. Inordinate delay in submission of stock statements to disclose the reduced stocks. But when such a situation arises it is not necessarily due to sickness even bad management of working capital by healthy units may also invite similar problem.
e When inadequacy of working capital is felt due to some of the signals stated above or some other signals due to personal request of the promoter the important parameter to be brought under review is the levels of activity i.e. sales (inventory turnover).
e Assuming that the nature of items or services sold is the same as in the past, the reduced level will indicate the reduction in generation of surplus & consequent erosion of working capital.
e The banker will have to oversee the components like current assets, current liabilities & addition to fixed assets.
e The main items of current assts & current liabilities which need to be constantly examined are:
Stocks of raw materials including packaging materials, tools & spares
Stocks in process
Finished goods
Receivables
Creditors
3. The units intending to adhere to banks requirements of working capital within the limits will do so for sometimes despite erosion of working capital due to reduced sales resultant losses at the cost of increased creditors or market borrowings.
4. The time will come when even if further drawings are not allowed by the banks due to non payment of interest and as a result the outstanding advances will keep on increasing.
l At this stage the unit will try to divert its transaction through other bank.
l At this juncture the banker will have to help the unit to identify the problem & give all possible assistance to allow the unit to operate without which the equation between banker & customer will suffer & attitudes of both the parties will harden with a resultant impasse. Eventually deteriorating situation will not be conducive to nurse the unit & hence against the basic interest of both the parties.
5. Irregular tendencies from the account like frequent bouncing of the cheques on financial ground, frequent excess over limits, non adjustment of over dues/ excess/ nonpayment of installment/ interest, increasing over dues in bill purchase/ bill discounting, non retirement of shipping documents against LCs/ invocation of claims of guarantee.
6. Diversion of working capital fund for acquiring fixed assets.
7. Opening of accounts with other banks under apprehension that the bank may use the credit proceeds for realization of over dues leaving no balance for meeting his day to day requirements for operating expenses resulting in low or no turnover in the account.
8. Adverse movement of current ratio, liquidity ratio, inventory/ turnover ratio gearing ratio, low profitability, adverse result of CRG as worked out on the basis of the financials.
9. Non compliance of the terms & conditions of sanction, non submission of stock statement/ monthly flash data regarding production, sales, and purchases with an intention to conceal suppress vital information.
10. Nonpayment of utility bills/ installment again term loan/ project finance. The banks should analyze the situation carefully and initiate the action of deferring its own recovery and granting further financial comfort to the borrower in problem by way of re structuring of existing facility or providing of additional finance to facilitate the promoters to overcome the financial obstacles. In this case, the banker needs to adequately convinced that the promoters of the concern don't have any ulterior motive/ willful defaulter
Major Causes of Sickness: Managerial deficiency / conflict among the stake holders
l Lack of proper maintenance of machinery / absence of up gradation plan.
l System loss / lower level productivity and higher end operating cost.
l Diversion of working capital fund.
l Dishonesty among the employees.
l Scarcity of power / delay in availing of power connection.
l Abrupt change in government policies.
l Absence of infrastructural facilities at the project site.
l Labor problem/ unrest.
l Time & cost over runs
l There exists one more causes and in some cases may be over lapping.
l From the experience this is very much apparent that the major cause of sickness in 50% of cases is various types of mismanagement.
l It is better for the bank to initiate proper action plan when any particular borrowing unit of their credit portfolio is showing the signals of sickness.
l It is said that prevention is better than cure. If bank takes precaution in appraising promoters in right perspective in the future, the risk of account to becoming non performing can be averted as mismanagement plays vital role in industrial sickness.
l The bad economic impacts of sickness are loss of productivity, down graded contribution of industrial sector, loss of revenue of government by way of taxes, locking of bank's funds.
l Considering the multi pronged bad effects of industrial sickness on the economy at large the initiative from the part of the government to bail out the sick industries should be further activated.
l Sick industries but having better prospect of rebounding if properly nursed should be well taken up within the bailout package to avoid the worst scenario to winding up operation.
l But in some cases where solution could not be found there is no other alternative but to winding up the operation of sick industrial unit.
l Selection and Implementation of Projects without the required feasibility studies.
l Supply of imbalanced and defective machinery.
l Inadequate/Non availability of working capital (in majority of the cases)
l Non provision of financial assistance for BMRE, where necessary.
l Lack of timely decision and support by the financial institutions and the related agencies (in majority of the cases)
l Loss incurred by natural calamities.
l Unauthorized inflow of smuggled and unofficially duty free foreign goods.
l Frequent power disruption, irregular supply & high price of power
l Improper utilization of productive capacity.
l Disruption of production due to political and labor unrest etc.
l High rate of interest on bank loan
l Marketing problem for locally produced goods.
l Upward movement of exchange rates.
l Fiscal anomalies between the imported raw material of locally produced goods and imported finished goods.
l Lack of sound management
l Lack of proper implementation of industrial policies.
Recommendations:
l Waiver of 100% penal and 50% 100% normal interest
l Rescheduling of outstanding loan for repayment in easy installments
l Provision of necessary working capital, financial and technical assistance to BIVIRE cases after conducting fresh feasibility studies.
l Withdrawal of all filed suits.
l Supply of electricity and other utilities on regular basis and discontinuance of peak hours of electricity.
l Unnecessary delays in providing financial assistance and support to be avoided.
l Stoppage of unauthorized inflow of foreign goods.
l Lowering of interest rate on industrial loan.
l Fiscal anomalies to be removed.
l Introduction of special insurance scheme on easy terms for natural calamities.
Compilation of accurate statistics for investment decision
l In order to provide protection to home industry, local goods which are produced abundantly should be discouraged for import.
Preventive measures:
l Macro economic Policy changes in the positive direction.
l Sub Sector wise Long term Policy
l Implementation of the Announced Polices within specific time frame.
l Continuation of benign policy.
l Development of Small Industry Sector
l Rationalization of Tariff.
l Boosting up of medium and small scale industries.
l Improvement of Infrastructural Facilities
l Monitoring of Saturation in Particular Industry Sub sector
l Development of Linkage Industries
l Active Support of Banks and Financial Institutions
l Expansion of Market Base both locally and through export.
l Facilitation of Enabling and conducive environment
Concluding remarks:
Every bank and financial institution should have a "Project Rehabilitation Cell" manned by the experts of various disciplines. There should be ongoing process of evaluation of the heath of the assisted units by the banks to detect early warning signals. For this, congenial bank client relationship is a must for extending co operation to each other.
Genuine sick units capable of being revived should be allowed rehabilitation package by way of rescheduling of existing loans, waiver/remission of interest payments, conversion of short term liabilities into long term obligations, etc. depending on the merit and nature of problems of industrial unit. If necessary, change of management of the sick units should be brought in to facilitate successful running of the projects. Only financial and management rehabilitations of the sick units will not yield the desired result unless Govt. assistance in the form of reduced taxes, duties, concessions on various charges like gas, electricity, etc., imposition of restriction on related import items etc. are made available. Bangladesh Bank may set up a Sick Industry Cell to monitor the performance of the lending institutions in handling the problems of sick units and to co ordinate the rehabilitation efforts of banks, financial institutions, Govt. and other agencies involved. Possibilities of mergers and acquisitions may be explored in case of sick industrial units not capable of being revived by their own strengths. Suitable policy guidelines may be framed in this regard. It is the considered opinion that if sick industries are rehabilitated in the right perspectives and on the basis of proper due diligence will contribute significantly towards the value addition in the country's GDP growth and will also augur well for the country's overall socio economic uplift.
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Mohammad Masoom is senior executive vice-president of National Bank Limited
