Inefficient management

Root cause for enterprises becoming loan defaulters - Case study – India

by N.S.Venkataraman

All over the world, it is not uncommon to find even large industrial units and commercial enterprises becoming sick and getting liquidated, due to the inability to service the debt. Often, the basic and fundamental reasons for such situation happening are largely similar in all countries.

Based on detailed investigation by Nandini consultancy Centre, based in Chennai and Singapore (www.nandinichemical.com), highlights of the case study of industrial sickness in India is explained in this article.

Indian scenario :

In recent years, particularly after the introduction of Insolvency And Bankruptcy, Code Act 2016 was implemented by Government of India, it has come to light that number of well known companies have been declared as loan defaulters and debt ridden companies. These companies were perceived to be well managed in the eyes of the general public due to their stage managed advertisement campaign,

General public were shocked to know about telecom companies in India such as Bharti Airtel, Tata Tele Services ,Vodofone, Idea that have defaulted in repayment of debt and the extent of their default in repayment which run into several thousand crores of rupees.

While the Supreme Court ordered that the telecom companies should clear the loans within specified period, these companies seem to be creating an impression that they would be forced to close down, if concessions in tariffs and waiver of loans would not be extended to them.

In the case of Air India, hugh debt burden and high level of loan default have reached such a high level, that Government of India has to conclude that there is no way to revive Air India at all in its present conditions and the Government of India has been forced to take steps to sell the entire company itself by auction, after providing much liberalized terms while conducting the auction.In the process, Government of India is likely to incur heavy loss, which would be tax payer’s money.

There are so many other sick industrial units and financing companies in India; that have caused high concern about the efficiency level of management of these companies.

Little impact of IBC

In India, Insolvency and Bankruptcy Code (IBC) have forced defaulting enterprises into panic mood and has also given wake up call to the banks. However,the ultimate benefits of this Code are yet to be realized, even after three years.

Undoubtedly, the IBC is an effective deterrent for willful and slippery defaulters; but at the same time, it is not a magic wand which will bring immediate relief to all stake holders .

To expect operational creditors to showcase resolve to rejuvenate business is asking for too much, in view of the long drawn out process of IBC.

Dilemma of banks and financing institutions :

Obviously, there is temptation to adopt the path of least resistance by the banks and financial institutions. Often,banks take a 50 to 60% haircut on loans and tax authorities cut its demand to settle the case.

It is very obvious that the banks have been liberally extending more loans to such defaulting companies in the past, to ensure that the units would not be closed. Such strategies of banks to stabilize the performance of the companies by extending further loans had not helped in most cases

Have the debt ridden companies taken the favoured treatment from the banks and government for granted ?

Government and banks are now facing dilemma as to whether they should enforce the rules and force the companies to repay the loans and outstanding debts at stipulated time, which may end up in closure of some units, resulting in huge loss of employment.

Warning signal ignored :

The fact is that sickness in enterprises including industrial organizations and commercial bodies do not happen all of a sudden over night. There would be enough indication of the impending disaster faced by the units. Owners and managements of sick units have obviously ignored the warnings and thought that they could get loans from banks and other financial institutions to overcome the problems.

Can one conclude that the management of the sick units are so inefficient and callous to allow matter to deteriorate to such an extent of sickness ? One cannot be blamed if such conclusion would be arrived at.

Why companies become sick ?

Many common men wonder as to how such huge loan default have happened and why these telecom companies and several others have not implemented remedial measures and evolved appropriate strategies to set right the issues to make the units to run efficiently with profit generation, so that the loan repayment schedule would be adhered.

Even companies operating in fast growing market such as tele communication get into state of sickness due to any one or more of the following reasons

* Lack of forward planning by the management, which result in not moving in positive direction in tune with the market trend and technology developments

* Poor corporate planning exercise that have resulted in not knowing the changes in trends in the existing market in quick time and not tracking the plans and priorities of the competitors.

* Unhelpful policies of the government in imposing taxes and duties and various tariff agreements with other countries that are detrimental to Indian companies.

* Corruption and nepotism in government machinery that causes delay in implementation of projects and creation of deliberate hurdles in functioning of the companies.

* Government organizations such as Discoms ( Power distribution companies in India) often do not pay the dues promptly to the suppliers.

* Counter productive environmental activism and creating unrest by environmentalists and political groups, that disable the units

* Trade Unions, now largely managed by politicians, being used for political purposes that result in destabilizing the company’s functions, by calling for frequent strike and agitations.

* Siphoning of the fund from the companies by owners by adopting dishonest practices.

* Family led companies, where incompetent relatives such as wife,brothers, sisters,sons, daughters,nephews and nieces are given prime positions, ignoring the claims of competent professional executives.

Ultimate yardstick to assess performance of companies

Certainly, every company, whether commercial enterprises or industrial units contribute to the progress and welfare of the country in one way or the other and on most occasions in several ways.

However, the best yardstick to assess the performance of the units would be to measure the profit generated by the companies.

There are several companies which have become sick and loan defaulters in the past and such units may still have valuable technology and modernized equipment and facilities apart from well trained manpower. However, such strength possessed by the companies, do not reflect on the profitability of the companies, in some cases.

Making adequate profit is compulsive need for the commercial organizations and industrial units. Therefore, whether the organizations belong to private sector or public sector, it would be appropriate to consider the units that are not run profitability as failed units.

Any efforts to interpret the performance of the unit by yardstick other than profitability of the units is a negative exercise and argument in vacuum.

Inefficiency of management-Root cause for the sickness

Like a failed student offering variety of explanations for the failure, management of failed units also offer “various justifications” for the sickness of the units. It is common to see such managements stating that sickness have happened due to reasons beyond their control.

It is often seen that whereas one industrial unit or commercial organization operating in particular field turning out good results, but other commercial organization \ industrial unit operating in the same field with nearly similar capacity and technology incurring loss and become sick. In such cases, the only difference between successful unit and sick unit is the quality of management and competence level of the top managers.

Certainly, there are several potential reasons for units becoming sick. However inefficiency of the management in reading the writing on the wall without loss of time with clear understanding of the ground realities is the most important cause for sickness. It is a myth to say that there is “impossible problem.” There would always be number of ways for overcoming “impossible problem“, if efficiency and pragmatism of the management would be there.

While good financial management is one of the key elements for the success of the units, technology inputs and marketing management practices and human relationships also have key roles to play in ensuing success of the enterprises. All such different aspects of management can be well managed, if there would be adequate forward planning and straight forward and pragmatic management practices would be ensured by the companies.

A careful analysis of the problems of sick units reveal the fact that timely solutions are not found and applied and “impossible problem” is allowed to persist for unduly long time .Such undue delays prove to be very costly , until the passage of time and lead to a situation that would be beyond repair resulting in “terminal illness”

What is the way out ?

It is necessary to clearly recognize the fact that in most cases ,the sick units cannot be revived simply by pumping fresh money into companies, when changes in the management team would not be ensured.

In today’s fast developing technology and management scenario, several banks and financial institutions have not equipped themselves with adequate and all round expertise to understand intricacies of multiple and interdependent management issues in variety of sectors. Banks and financial institutions often expose themselves by funding the projects without adequately assessing the competency of the management of the units and adopting practice of constantly and adequately monitoring the performance of the units.

In such circumstances, it is often seen that banks and financial institutions come to know about state of affairs and problems of the units only when debt repayment schedule are not adhered to and loan default take place. in such scenario financial institutions are not forewarned.

It is a fact that while financial institutions monitor the funded projects, it can be done only to a limited extent. Certainly, the managers in the banks and financial institutions cannot view themselves as substitute for the managers in industrial units and commercial establishments’

The fact is that in India today, the biggest stake holders in the companies are the banks and financial institutions, much more than promoters and equity holders. Therefore, the banks and financial institutions have to necessarily become more assertive in insisting that the loans should be repaid as per schedule.

Both the financial institutions and government should realize that the management of the failed units need no consideration or sympathy and they should be treated as failed team of managers.

Obviously, in such cases, best way of protecting the interest of the banks and financial institutions who are the major stack holders is to mercilessly dismiss the management of the debt ridden defaulting companies. They need to have necessary power to do so and it is necessary that the legal conditions should be created for such practices.

Often the management of debt ridden companies create a “bogey” that tough stand by the financial institutions will result in closure of the units and lead to loss of production as well as job loss. Financial institutions often are frightened by such “bogey” and give a long hope for debt ridden companies and such approach become counterproductive.

Banks need not be worried about such “bogey” since there are always better manages in India and elsewhere who can take over such units.

Now, the problem happens only since the financial institutions act too late when the units become “terminally sick”.

IBC also address such problems to some extent but not enough. Owners of the units are given huge opportunities to delay investigation process and this makes the situation worse.

Extending powers to the financial institutions and banks to change the management of sick units by due process in quick time is the need of the day.