flowchart TD A[Causes of sickness] --> B[Internal causes] A --> C[External causes] B --> B1[Managerial] B --> B2[Financial] B --> B3[Production / technical] B --> B4[Marketing] B --> B5[Personnel] C --> C1[Government policy] C --> C2[Economic environment] C --> C3[Market changes] C --> C4[Infrastructural bottlenecks] C --> C5[Natural calamities]
95 Sickness in Small Industries
Industrial sickness is the persistent erosion of an enterprise’s net worth arising from sustained losses, growing arrears, and inability to meet obligations as they fall due. Sickness is more frequent in small enterprises, where finance, marketing and managerial cushions are thin. India’s framework rests on RBI definitions, the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) — repealed in 2016 — and the Insolvency and Bankruptcy Code (IBC), 2016 that supplanted it. Standard reference textbooks are Vasant Desai, Dynamics of Entrepreneurial Development; Khanka, Small-Scale Industries; and the RBI Master Circulars on MSME finance.
TipWorking definitions
| Term | Working definition |
|---|---|
| Industrial sickness | A condition in which a unit’s accumulated losses erode its net worth, profitability, liquidity and solvency to the point where its continuation is in doubt. |
| Incipient sickness | Early-stage sickness — symptoms have appeared but the unit is still operationally salvageable through timely intervention. |
| Stress accounts | RBI’s three-tier classification (SMA-0, SMA-1, SMA-2) of accounts where principal or interest is overdue but not yet NPA. |
95.1 Definitions of Sick Unit
TipDefinitions over time
| Definition | Source | Criteria |
|---|---|---|
| Original RBI (1989) | Tiwari Committee | Cumulative cash losses for 4+ years and erosion of 50 % net worth |
| Kohli Committee | RBI 1990 | Continuous decline in net worth over two years |
| SICA, 1985 (medium / large) | Section 3(1)(o) | Accumulated losses ≥ net worth at end of any FY |
| RBI 2012 (Nair Committee, MSME) | RBI Notification 2012 | (a) any of borrowal accounts NPA for 3 months; or (b) erosion of net worth due to losses ≥ 50 % of peak net worth in past four years |
| IBC, 2016 | Section 4 | Default of ₹1 crore or more triggers CIRP |
95.2 Magnitude of Sickness in India
According to the RBI’s Trend and Progress of Banking and the MSME Annual Reports, stressed assets in MSME loans typically run at 8–13 % — far higher than corporate loans. The geography is concentrated in clusters that have lost competitiveness (Surat power-looms, Punjab cycle parts, Coimbatore foundry). Sickness in small industries is more numerous though smaller in value than corporate sickness.
95.3 Symptoms of Sickness
TipSymptoms
| Operational | Financial |
|---|---|
| Decline in capacity utilisation | Cash losses |
| Quality complaints | Erosion of net worth |
| Late deliveries | Default in instalments / interest |
| High labour turnover | Stretched creditor and employee dues |
| Stockpiling of finished goods | Drawing power exceeded; account overdrawn |
| Frequent breakdowns | Statutory dues unpaid (PF, GST) |
95.4 Causes of Sickness
Causes are usually classified as internal (within management’s control) and external (beyond management’s control):
TipInternal causes (typical)
| Domain | Examples |
|---|---|
| Managerial | Lack of strategic direction, family disputes, dishonest promoters |
| Financial | Under-capitalisation, over-trading, weak working capital management, dividend mis-management |
| Production | Obsolete technology, poor maintenance, low capacity utilisation |
| Marketing | Wrong market choice, dependence on single customer / product |
| Personnel | Poor industrial relations, attrition |
TipExternal causes
| Domain | Examples |
|---|---|
| Government policy | Sudden tariff change, demonetisation, GST transition |
| Macro environment | Recession, inflation, exchange-rate volatility |
| Market | Loss of monopoly, foreign competition, technology disruption |
| Infrastructure | Power shortages, transport bottlenecks |
| Natural | Floods, droughts, COVID-19 |
95.5 Consequences
Sickness imposes social costs disproportionate to financial losses: loss of jobs, blocked credit, idle assets, regional decline, and follow-on sickness in supplier ancillary units. The multiplier effect of MSME sickness is therefore a public-policy concern.
95.6 RBI Framework for Revival of MSMEs (2016)
The RBI’s Framework for Revival and Rehabilitation of MSMEs (March 2016) prescribes a three-step protocol:
TipThree-step revival framework
| Step | Action |
|---|---|
| 1. Identification of incipient stress | Banks classify accounts into Special Mention Accounts: SMA-0 (overdue 1–30 days), SMA-1 (31–60 days), SMA-2 (61–90 days) |
| 2. Reference to Committee | A unit-level Committee for Stressed MSMEs is constituted by the lender; corrective action plan within 30 days |
| 3. Resolution | Three options: rectification, restructuring, recovery (the “3-R” principle) |
95.7 Insolvency and Bankruptcy Code, 2016
The IBC is the unified insolvency framework that replaced SICA, the SARFAESI Act framework for recovery, and the SFCs Act. Salient features include:
TipIBC essentials
| Feature | Detail |
|---|---|
| Trigger | Default of ₹1 crore or more |
| Adjudicating authority | NCLT for corporate debtors; DRT for individuals / proprietorships |
| Timeline | Corporate Insolvency Resolution Process (CIRP) of 180+90+60 days = 330 days max |
| Resolution professional | Manages the company during CIRP |
| Committee of Creditors (CoC) | Approves resolution plan with 66 % vote |
| Pre-pack | For MSMEs (introduced 2021): debtor-led, 120-day timeline |
95.8 Pre-Pack for MSMEs
Introduced in April 2021, the pre-packaged insolvency resolution process (PPIRP) allows MSME corporate debtors to retain control while negotiating a resolution plan with creditors before formal NCLT admission. The total timeline is 120 days. This addresses the typical concern that mainstream CIRP is too time-consuming and value-destructive for small units.
95.9 Other Revival Instruments
TipRevival instruments
| Instrument | Purpose |
|---|---|
| One-Time Settlement (OTS) | Compromise settlement with bank for haircut |
| Restructuring under RBI Master Circular | Re-pricing, deferment, extension of repayment |
| Debt Recovery Tribunals (DRTs, 1993) | Adjudicate bank dues > ₹20 lakh |
| SARFAESI Act, 2002 | Banks enforce security without court intervention |
| State-level Committees (SLBC) | Co-ordinate restructuring at state level |
| Asset Reconstruction Companies (ARCs) | Buy NPAs from banks for resolution |
95.10 Government Programmes
Recent rescue programmes targeting MSME stress include the Emergency Credit Line Guarantee Scheme (ECLGS, 2020) with a corpus of ₹4.5 lakh crore; the Subordinate Debt Scheme (CGSSD, 2020) for stressed MSMEs (debt up to 15 % of promoter’s stake or ₹75 lakh); and the PM Vishwakarma Scheme (2023) for traditional artisans.
95.11 Practice Questions
Q 01 SICA Easy
The Sick Industrial Companies (Special Provisions) Act, SICA, was repealed by the:
View solution
Correct Option: B
The Insolvency and Bankruptcy Code, 2016 repealed SICA (which had been amended in 2003 but never fully operationalised) and replaced BIFR with NCLT-led resolution.
Q 02 RBI 2012 definition Medium
According to the RBI Nair Committee (2012), an MSME unit is “sick” if:
View solution
Correct Option: A
The RBI 2012 definition for MSMEs uses two alternative tests: NPA for 3+ months, or erosion of peak net worth ≥ 50 % over past four accounting years.
Q 03 SMA Medium
RBI’s Special Mention Account SMA-2 status applies when principal / interest is overdue for:
View solution
Correct Option: C
SMA-0 (1–30), SMA-1 (31–60), SMA-2 (61–90). Beyond 90 days the account becomes a non-performing asset (NPA).
Q 04 3R Medium
The “3R” approach in the RBI 2016 Framework for Revival of MSMEs stands for:
View solution
Correct Option: B
The 2016 Framework offers three resolution options — Rectification, Restructuring and Recovery — for stressed MSME accounts.
Q 05 IBC trigger Medium
The minimum default amount that triggers the Corporate Insolvency Resolution Process under the IBC is:
View solution
Correct Option: C
In March 2020, the threshold was raised from ₹1 lakh to ₹1 crore to insulate MSMEs and prevent COVID-induced rush of insolvency filings.
Q 06 Pre-pack Hard
The pre-packaged insolvency resolution process for MSMEs (PPIRP) introduced in 2021 has a maximum timeline of:
View solution
Correct Option: C
PPIRP for MSMEs is debtor-led with a 120-day timeline (90 days to submit plan + 30 days for NCLT approval).
Q 07 SARFAESI Medium
The SARFAESI Act, 2002, allows secured creditors to enforce security:
View solution
Correct Option: B
SARFAESI permits banks and FIs to take possession of secured assets and enforce them without intervention of court / tribunal, on 60 days notice.
Q 08 Match the following Hard
Match the law / scheme with its function:
| (P) SICA 1985 | (1) Subordinate debt for stressed MSMEs |
| (Q) IBC 2016 | (2) Reference to BIFR |
| (R) CGSSD 2020 | (3) NCLT-led CIRP |
| (S) ECLGS 2020 | (4) Emergency credit line |
View solution
Correct Option: A
SICA 1985 — reference to BIFR; IBC 2016 — NCLT-led CIRP; CGSSD — Subordinate debt for stressed MSMEs; ECLGS — emergency credit line.
ImportantQuick recall
- RBI 2012 (Nair) MSME sick definition: NPA 3+ months OR ≥ 50 % erosion of peak net worth in past 4 years.
- SMA-0 / 1 / 2 = 1–30 / 31–60 / 61–90 days overdue; > 90 days = NPA.
- IBC 2016 trigger ₹1 crore default; CIRP 330 days max; PPIRP for MSMEs 120 days.
- 3R framework: Rectification, Restructuring, Recovery.
- ECLGS, CGSSD, OTS, SARFAESI, ARCs are the toolbox for distressed assets.