96  Sickness in Small Industries

96.1 Concept

Industrial Sickness refers to the inability of an industrial unit to generate adequate internal surplus to service its debts, leading to financial distress and decline. The Sick Industrial Companies Act (SICA) 1985 institutionalised the concept for large units. For MSMEs, the RBI definition (since 2012) is used — see below.

96.2 RBI Definition of Sick MSME (2012)

TipRBI MSME sickness criteria

A micro/small enterprise is sick if any of: - Principal or interest unpaid for 3 months or more. - There is erosion in net worth due to losses ≥ 50% of net worth in the previous accounting year. - The unit has been in commercial production for at least 2 years.

Earlier definitions (pre-2012) used cash-loss for 2 years + over-due loans + erosion.

96.3 Stages of Sickness

TipSickness life cycle
  1. Healthy stage — normal operations.
  2. Tending towards sickness — early warning signs.
  3. Incipient sickness — first signs of distress.
  4. Sickness — formal classification.
  5. Chronic sickness — beyond revival.
  6. Closure / Liquidation.

96.4 Symptoms / Warning Signals

TipSymptoms of sickness
  • Continuous decline in sales / market share.
  • Cash flow deficits.
  • Default in payments to creditors / banks.
  • High inventory levels.
  • Declining capacity utilisation.
  • Increasing employee turnover.
  • Frequent change in management.
  • Delayed financial reporting.
  • Rising debt-equity ratio.
  • Audit qualifications.
  • Quality issues, customer complaints.
  • Statutory dues unpaid.

96.5 Causes of Sickness — Internal

TipInternal causes (controllable)
  • Poor management — strategy, planning.
  • Inadequate finance / over-trading.
  • Marketing inefficiencies.
  • Production / technology obsolescence.
  • Personnel issues — labour unrest, turnover.
  • Inadequate working capital.
  • Diversion of funds.
  • Family disputes (common in SSI).
  • Lack of cost control.
  • Poor product design.
  • Inventory mis-management.

96.6 Causes of Sickness — External

TipExternal causes (uncontrollable)
  • Government policy changes.
  • Economic recession / slowdown.
  • Raw-material scarcity / price volatility.
  • Demonetisation, GST transition shocks.
  • COVID-19.
  • Competition — domestic and import.
  • Power, transport, infrastructure.
  • Technology obsolescence.
  • Labour problems — strikes, wage shifts.
  • Natural calamities.
  • Bank-credit squeeze.
  • Foreign-exchange fluctuations.
  • Geopolitical / war-related.

96.7 Indian Statistics

TipSickness in India
  • 4th All-India MSME Census found significant percentage of sick units.
  • COVID-19 worsened the situation; ECLGS provided ₹4.5+ lakh Cr relief.
  • High NPA in MSME loans during 2020-21.
  • Insolvency under IBC 2016 for medium/large.
  • Sick units cluster in textile, leather, engineering, food processing.

96.8 Detection of Sickness

TipTools for early detection
  • Altman Z-Score — bankruptcy prediction.
  • Argenti Failure Model.
  • Cash flow analysis.
  • Ratio analysis — current, debt-equity, interest coverage.
  • Trend analysis — sales, profit.
  • Industry comparison.
  • Early Warning System (EWS) — banks track 36+ indicators.
  • Special Mention Account (SMA) classification by RBI.

96.9 Rehabilitation / Revival Measures

TipRevival measures
  • One-time settlement (OTS) with banks.
  • Restructuring of loans — moratorium, lower interest, extended tenure.
  • Asset Reconstruction Company (ARC) route.
  • Additional working-capital infusion.
  • Technology upgradation.
  • Mergers / Takeovers.
  • Voluntary closure / Exit.
  • Strategic alliances.
  • Government grants / Subsidies.
  • Management change.
  • Marketing support.
  • Manpower rationalisation / VRS.

96.10 Indian Framework for Sick Units

TipIndian regulatory framework
  • SICA 1985 — Sick Industrial Companies Act — established BIFR (Board for Industrial and Financial Reconstruction). Repealed 2003 (effective 2016).
  • AAIFR — Appellate Authority.
  • SICA Repeal Act 2003 (effective 2016).
  • IBC 2016 — Insolvency and Bankruptcy Code — Pre-pack for MSMEs (2021).
  • CDR Mechanism (Corporate Debt Restructuring) — 2001.
  • RBI Framework for Revival and Rehabilitation of MSMEs (2015).
  • MSME Pulse / TransUnion CIBIL MSME — early warning.
  • SAMADHAAN — delayed payment.
  • MSME Champions Portal.
  • Pre-packaged insolvency for MSMEs under IBC (2021).
  • Voluntary Liquidation under IBC.

96.11 Pre-pack Insolvency for MSMEs

TipPre-pack insolvency (2021)
  • For default ≥ ₹10 lakh up to ₹1 Cr.
  • Debtor-in-possession but creditor-controlled.
  • 120 days timeline.
  • Insolvency Professional supervises.
  • Designed for MSMEs to be quicker than CIRP.

96.13 Practice Questions

Q 01RBI MSMEMedium

RBI considers an MSME sick if principal/interest unpaid for:

  • A3 months or more
  • B1 month
  • C6 months
  • D12 months
View solution
Correct Option: A
3 months default + 2-yr commercial production.
Q 02SICAMedium

SICA 1985 set up:

  • ABIFR
  • BSIDBI
  • CIBC
  • DNCLT
View solution
Correct Option: A
Board for Industrial and Financial Reconstruction.
Q 03AltmanMedium

Altman Z-Score is used for:

  • ABankruptcy prediction
  • BSampling
  • CMarketing
  • DInventory
View solution
Correct Option: A
Edward Altman (1968).
Q 04IBCMedium

IBC came into force in:

  • A2016
  • B2014
  • C2018
  • D2020
View solution
Correct Option: A
Insolvency and Bankruptcy Code 2016.
Q 05Net worthMedium

RBI sickness — erosion in net worth ≥:

  • A50 %
  • B25 %
  • C100 %
  • D10 %
View solution
Correct Option: A
50 % of net worth.
Q 06Pre-packHard

Pre-pack insolvency for MSMEs was introduced in:

  • A2021
  • B2016
  • C2018
  • D2023
View solution
Correct Option: A
PIRP under IBC, 2021.
Q 07External causeEasy

Which of these is an EXTERNAL cause of sickness?

  • ARecession
  • BFamily dispute
  • CPoor planning
  • DMarketing weakness
View solution
Correct Option: A
Recession is external; rest internal.
Q 08SMAHard

SMA classification by RBI relates to:

  • AEarly identification of stressed accounts
  • BSME exchange
  • CBond auction
  • DFDI
View solution
Correct Option: A
Special Mention Account — SMA-0/1/2 based on default days.
Q 09OTSMedium

OTS in bank revival means:

  • AOne Time Settlement
  • BOperational Trade Subsidy
  • COver-the-shoulder review
  • DOutsourced Tax Service
View solution
Correct Option: A
Negotiated settlement at lower amount.
Q 10RBI frameworkHard

RBI Framework for Revival and Rehabilitation of MSMEs is from:

  • A2015
  • B2006
  • C2020
  • D2018
View solution
Correct Option: A
RBI 2015 — institutional framework.
Q 11CDRMedium

CDR mechanism started in:

  • A2001
  • B1991
  • C1985
  • D2016
View solution
Correct Option: A
Corporate Debt Restructuring 2001.
Q 12ArgentiHard

Argenti Model is used for:

  • APredicting failure
  • BDemand forecasting
  • CCAPM
  • DMarketing
View solution
Correct Option: A
John Argenti failure-prediction model.
Q 13ECLGSMedium

ECLGS was launched in response to:

  • ACOVID-19
  • BDemonetisation
  • CGST
  • DSubprime
View solution
Correct Option: A
Emergency Credit Line Guarantee Scheme 2020.
Q 14SymptomEasy

Which is a sickness symptom?

  • ADefault in bank dues
  • BRising profits
  • CIncreasing capacity utilisation
  • DStrong cash flow
View solution
Correct Option: A
Default symptom.
Q 15MatchHard

Match:

(i) SICA (a) 2016
(ii) IBC (b) 1985
(iii) Z-Score (c) 2021
(iv) Pre-pack (d) Altman
  • A(i)-(b), (ii)-(a), (iii)-(d), (iv)-(c)
  • B(i)-(a), (ii)-(b), (iii)-(c), (iv)-(d)
  • C(i)-(c), (ii)-(d), (iii)-(a), (iv)-(b)
  • D(i)-(d), (ii)-(c), (iii)-(b), (iv)-(a)
View solution
Correct Option: A
SICA—1985; IBC—2016; Z-Score—Altman; Pre-pack—2021.

96.13.1 Advanced Format Questions

AR 1Assertion-ReasonHard

A: IBC 2016 introduced time-bound insolvency resolution.
R: SICA 1985 / BIFR was found ineffective and was repealed.

  • ABoth true; R explains A
  • BBoth true; R does not explain A
  • CA true, R false
  • DA false, R true
View solution
Correct Option: A
S 1Statement-basedMedium

Internal causes: (i) Poor management. (ii) Family disputes. (iii) Lack of WC. (iv) Recession.

  • A(i), (ii), (iii) only — (iv) is external
  • BAll four
  • C(iv) only
  • D(i) only
View solution
Correct Option: A
S 2Statement-basedHard

Revival measures: (i) OTS. (ii) Restructuring. (iii) ARC route. (iv) Pre-pack PIRP (2021).

  • AAll four
  • B(i) and (ii) only
  • C(iii) and (iv) only
  • D(i), (ii), (iii) only
View solution
Correct Option: A

96.14 Quick Recall

ImportantQuick recall
  • Sickness: inability to generate surplus to service debts.
  • RBI MSME definition (2012): 3-month default OR 50% net-worth erosion + 2-yr production.
  • Stages: Healthy → Tending → Incipient → Sick → Chronic → Closure.
  • Symptoms: declining sales · cash deficit · payment default · high inventory · low capacity · turnover · mgmt change · audit qualifications · DE-ratio rise · statutory dues.
  • Internal causes: poor mgmt · finance · marketing · technology · personnel · WC · fund diversion · family disputes · cost control · inventory.
  • External causes: policy · recession · raw material · GST/demonetisation/COVID · competition · infra · technology obsolescence · labour · calamities · credit squeeze · FX · geopolitics.
  • Detection: Altman Z-Score (1968) · Argenti · ratios · cash flow · industry comparison · EWS · SMA classification (RBI).
  • Revival: OTS · restructuring · ARC · WC infusion · technology upgradation · M&A · alliances · grants · mgmt change · marketing · VRS.
  • India framework: SICA 1985 (BIFR), AAIFR; SICA repealed 2003 (effective 2016); IBC 2016; CDR (2001); RBI MSME Revival Framework 2015; MSME Pre-pack PIRP 2021 (₹10L-₹1Cr default, 120 days); MSME Samadhaan; ECLGS COVID.
  • Modern: AI/ML EWS · AA framework · stressed-asset funds · cluster-based revival · sustainability-linked loans · Bharat Credit Risk Index · TReDS.