Banks disburse Rs 1,200 crore of interest-free loans to sugar mills

Written by Arun S | Banikinkar Pattanayak | New Delhi | Updated: Apr 5 2014, 00:36am hrs
Banks have disbursed interest-free loans of about R1,200 crore to cash-strapped sugar mills as of end March, out of the R6,600 crore approved by the government in December, official and industry sources said on Thursday.

As many as 300 mills have applied for interest-free debt worth Rs 6,500 crore until March 31, of which loans to the tune of R3,000 crore were sanctioned by the end of the last fiscal, they added. Banks are required to complete the process of sanctioning loans by June and disburse by September. The interest-free loans are to be used exclusively for clearing dues for cane purchases during the marketing year through September 2013 as well as this year.

As of March 31, sugar mills owed farmers R15,000 crore for cane purchases with Uttar Pradesh accounting for around 70% of the dues, according to data by the Indian Sugar Mills Association (ISMA). Mills usually clear cane dues using proceeds from sugar sales or working capital loans, or reserves.

However, there has still not been any rethink on relaxing the stringent eligibility criteria for availing of loans, as sought by the sugar industry, and loans are being sanctioned only to those fulfilling all the norms, said one of the bankers involved in this process. This has reinforced fears that many mills, which are already stressed and are in need of the interest-free loans more urgently than some others, may not get any succour.

In January, the department of financial services had written to the Indian Banks' Association, saying lending would be subject to various norms relating to security, future cash flows for the life of loan (five years), establishing the viability and debt-servicing capacity, conduct of loan including the restructuring guidelines as notified by the RBI for the sugar industry from time to time. Mills whose loan accounts have turned NPA are also covered under the scheme, provided the state government concerned gives its guarantee for their new loans.

Earlier this year, sugar mills, especially in Uttar Pradesh, had expressed their inability to clear cane arrears due to an unprecedented liquidity crunch stoked by a drastic mismatch between prices of sugar and cane. So, in December, the Cabinet committee on economic affairs decided to offer interest-free loans and the interest burden, estimated at R2,750 crore over five years, would be borne by the Centre through the Sugar Development Fund. Mills will have to repay the loans in five years, with a moratorium on repayment in the first two years.

Industry executives have warned that cane arrears have been piling up as mills, which usually use up their cash reserves in the first 2-3 months of crushing, are unable to ease sugar stocks significantly as well as quickly this year. However, the recent pick-up in sugar prices, triggered by a drop in production and lingering concerns about the monsoon, will help the industry if it continues for some more time.