Cotton textile cos losses may affect banks

Written by R Ravichandran | Chennai | Updated: Jan 16 2012, 06:03am hrs
The cash losses being run up by the Indian cotton textile companies will hit their debt servicing capacity, creating more pain for Indian banks. The current exposure of the banks to the textile sector is more than R6,000 crore.

In a recent report, Fitch Ratings noted that while the Indian governments debt restructuring proposal for the textile sector will provide temporary relief from liquidity pressure, it will not stem deterioration in the capital structure of cotton textile companies, most of which are heavily geared.

The textile ministry recently recommended a moratorium on Indian banks on loans extended to textile companies, after cotton textile manufacturers reported operating losses for first half of FY12. The operating losses were most pronounced in cotton yarn manufacturing and lower-end fabric due to exceptional volatility in cotton prices, making them more prone to severe liquidity risks. Incidentally, the textile ministry does not have a secretary after Rita Menon retired in December 2011.

Of the total exposure by banks to the textile sector, 75% is to the troubled cotton yarn sector. Restructuring of loans will delay the deleveraging of Indian textile companies as repayments are rescheduled or deferred, keeping debt levels high, said Tanu Sharma, associate director in Fitchs corporates team.

Leveraging continues to be affected adversely by high working capital debt and lower margins. Given the uncertainty over global economic recovery and, consequently, around offshore demand for textiles, the risk is that cotton textile companies, hit by cash losses or with large debt amid ongoing capex, would need to undergo a financial restructuring, she added.

K Selvaraju, the secretary-general of Southern India Mills Association, which comprises 2,000 cotton yarn/spinning mills, with more than 1,300 mills are small and medium in nature and have been situated in Tamil Nadu in particular, have incurred a loss of more than R11,000 crore in last one year due to cartelisation of foreign cotton traders and severe price crash of both cotton and yarn since January 2011 owing to restrictions on cotton export and suspension of yarn exports.

Flush with huge funds, a few multinational traders who entered into Indian cotton markets, have bought out the cotton and yarn production completely, and ended up creating artificial shortage in domestic market during October-April period, which led mills to buy the commodity at high costs to ensure mills running continuously, he said.

With requests from mills and allied industries, former Union textiles minister Dayanidhi Maran brought out a ceiling, thereby, restricting exports of 55 lakh bales a year. However, the entire quantity were expored by traders in a short span of 45 days, exploiting global shortage and better price remuneration, leaving the domestic mills in the lurch. In a short span of a year, the cotton per candy price jumped from R38,000 to R62,500 a candy during Ocober 2010-April 2011 period, and forced the domestic mills to buy at such an exorbitant price, putting them in financial stress, Selvaraju pointed out. Relying on the traders claims that there the prices will go up further to R80,000 a candy and to ensure continuous productivity, the mills were forced to borrow heavily to buy the cotton at high costs and entered into huge debt burden. To all our disappointment, the prices crashed to the old level of R38,000 due to crash in global markets in March/April 2011, left the mills with the cash loss of around R6,000 crore, he said.

To a question, he said, It was the same situation on the yearn front too. To cash in on the seasonal period, traders exported the entire ceiling of 720 million kg of yarn by December, anticipating government to relax the overall export ceiling to 1,000 million kg, but in vain and could not do so in the January-March 2011 period, and once again indebted to the tune of R6,000 crore more on yarn side.

With an overall inventory loss of around R12,000 crore, coupled with the declined demand of both cotton and yarn owing to closure of 750-odd dyeing units in and around Triupur, the main sources of yarn, the prices of yarn crashed from a high of R285 a kg to R130 and R100 a kg during April and May, which led to huge liquidity problems in the cotton mills sector, he said.

The 40% power cut, FTA with Bangladesh and other Saarc countries, closure of Tirupur dyeing units, sluggish demand in the European and US markets and huge financial burden of around R12,000 crore have all led to the southern mills, accounting for 47% of Indias total production, cut their output to one-third of their normal capacity over the last few quarters. The situation is grim as most of the mills are on the verge of closure or facing closure. Even those big mills which have been making profits have started reporting huge losses owing to the ongoing crisis, he said.

He said, Despite our repeated reminders and requisitions to RBI, ministries concerned, seeking waiver of interest and restructuring of debt apart from issuance of fresh working capital to back to normal, nothing happened so far. Unless and until RBI and the ministries take immediate steps, it is very difficult for the bankrupt mills to revive back, he added. A special provisioning should be made in the RBI guidelines to ensure adequate support to this sector as there are around 2,000 mills are in this region with more than 1,300 are in the small and medium sector. Nearly 200,000 people have already lost their jobs owing to poor productivity, he said further.