Hands off policy issues: UP to banks on cane pricing

Written by Banikinkar Pattanayak | New Delhi | Updated: Dec 19 2014, 14:30pm hrs
Sugar caneTogether, SBI and PNB have an exposure of Rs 5,000-6,000 crore to sugar mills in the state, accounting for the largest chunk of loans to the industry. (Reuters)
Sugar mills in Uttar Pradesh may be bleeding profusely, but the state government wants the Centre to tell their nervous lenders that any attempt by them to influence policy matters is unwelcome.

Irked by letters from the chairpersons of State Bank of India and Punjab National Bank to the state government seeking the implementation of the Rangarajan panel formula on cane pricing so that cash-starved mills ability to pay off debt improves, UP chief secretary Alok Ranjan has written to the Union finance ministry to ask the lenders to keep off from the state governments policy affairs.

In a strongly-worded letter, written in Hindi, to financial services secretary GS Sandhu late last month, Ranjan said: ...the Union government is expected to issue orders to the aforesaid authorities, conveying to them that any interference in the states internal policy matters is not appropriate, as it vitiates the atmosphere in the sugar sector with which lakhs of farmers are associated and could potentially agitate them.

Together, SBI and PNB have an exposure of Rs 5,000-6,000 crore to sugar mills in the state, accounting for the largest chunk of loans to the industry.

Alarmed by the prospects of loans turning bad as the sugar industrys operations remained unviable due to exorbitantly high raw material prices fixed by the state, SBI chairman Arundhati Bhattacharya and PNB chairman KR Kamath had written to the UP chief secretary to urgently finalise a cane pricing formula, factoring in interests of all stakeholders.

The Allahabad High Courts order that farmers would have the first right over the realisation from sugar sales, and not the lenders, had exacerbated the banks fears about a

rise in non-performing assets.

In the letter, Bhattacharya had said: The cane pricing policy followed by the UP government seems to be the primary reason for the high losses incurred by the sugar mills in UP, leading to cane payment arrears. It is worth serious examination whether the state government should link sugarcane prices with sugar prices as per the Rangarajan committee formula (75% of the sugar price to be paid to sugarcane farmers), which has been adopted by all other major states producing sugar.

She had cautioned that banks wouldnt be able to lend to mills unless the state implemented the Rangarajan formula and also offered subsidy to mills in accordance with a policy by the state government implemented in 2004, which was abruptly suspended in 2007, leaving mills that had invested heavily cash-strapped. This is to ensure that the viability of sugar operations in UP by mills improves so that loans dont turn bad. The PNB chief, too, had echoed the sentiments.

In the letter to the finance ministry, Ranjan said a panel headed by the chief secretary himself is looking into all aspects of the sugar sector, including the mills demand to fix a cane pricing formula. He added that the state government is trying its best to get the cane arrears (Rs 2,380 crore) cleared and raw material crushing started by mills as soon as possible. He complained that despite financial assistance to the mills by both the state and the Centre, they havent yet cleared dues to farmers for cane supplies in 2013-14.

The UP government had last year promised the mills to come up with a cane pricing formula by April 2014 and had set up the panel under the chief secretary. However, the mechanism is yet to be firmed up despite repeated demands by the industry. The state government had also pledged to offer a financial package worth Rs 20 per quintal to mills last year if they started crushing operations. However, while Rs 11 per quintal was offered in the last season, another cash incentive of Rs 6 per quintal was announced only recently and is yet to be paid to mills. This, too, after the mills threatened to suspend operations in 2014-15 unless the government fulfilled all its previous promises, including the cane pricing formula. Last month, the state government also agreed to look into the ways of providing subsidy worth another Rs 3 per quintal, but no provision towards this has been made yet.

Mills in UP have already incurred around Rs 7,250 crore in losses for the three years through 2013-14 as returns from sugar sales failed to keep pace with the state-advised price (SAP) for cane fixed by the UP government, which, at Rs 280 per quintal, was 33% higher than the benchmark rate set by the Centre.