Sugar rescue dead on arrival; finmin kills plea for easier norms

Written by Banikinkar Pattanayak | New Delhi | Updated: Jan 30 2014, 06:09am hrs
ChidDFS has turned down the mills? demand for relaxing some of the ?rigid? eligibility conditions. Reuters
NEARLY two months after the Sharad Pawar-led panel recommended interest-free loans to bail out the cash-starved sugar industry and more than a month after the Cabinet Committee on Economic Affairs (CCEA) approved a Rs 6,600-crore package for this purpose, not a single mill has been sanctioned any amount yet.

Worse, sources told FE that the department of financial services (DFS) has turned down the mills demand for relaxing some of the rigid eligibility conditions for banks to start disbursing fresh loans to the industry. Sources say more than half of the 600-odd cash-strapped mills which must clear cane arrears wont qualify for interest-free loan under current norms. Unless the stalemate is resolved, the crisis in the industry hit by high cane prices and subdued realisation from sugar sales could aggravate, further eroding mills ability to pay farmers for raw material purchases.

Cane arrears in Uttar Pradesh alone could hit R7,000 crore by January end, including last years arrears, defeating the very purpose for which interest-free loans were approved.

Mills in Uttar Pradesh were expected to get Rs 1,600-1,700 crore out of the interest-free loan package.

According to the DFS modalities, lending will 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 Reserve Bank Of India 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.

Moreover, loans will have to be backed by the existing security and collaterals of the sugar industry availing of the loan, including other assets of promoters, which are free from encumbrances, to be decided by the individual banks.

In a letter to the Indian Banks Association on Monday, the DFS has rejected demand by the Indian Sugar Mills Association (ISMA) to reconsider these conditions, reinforcing fears of higher cane arrears and eventual closure of stressed mills.

The department said in the letter: In view of the extant guidelines of RBI, all the lending banks will have to satisfy themselves with the sugar mills capacity to service the debt as per the individual banks loan policy. It added: The loans proposed to be sanctioned to the sugar mills will be as a working capital loan and, therefore, banks would need to maintain a security cover as per the sanctioned terms and loan policies. With this, it also rejected the ISMA demand to allow mills to give residual charge as security for loans, instead of offering other assets of promoters as collateral.

However, millers say that if sugar companies were so stable financially that they could take loans on commercial terms, they wouldnt have approached the government for a bailout in the first place. They also argue that interest-free loans shouldnt be treated on par with usual loans as the government has mandated that the funds be used exclusively for the payment of cane arrears to farmers, and not for any other business transaction.

All of us know that the sugar industry has made cash losses during last two years. With surplus sugar availability, substantial dip in sugar prices and unreasonably high cane prices, the sugar mills will certainly lose money this year again. Their viability and future cash flows etc would, therefore, be under pressure. So, any such conditions would basically block possibility of getting loans by mills, said a UP-based miller.

ISMA had earlier said since sugar prices had fallen by Rs 7-8 per kg in the last 14-15 months while cane prices remained at elevated levels, cane arrears could cross Rs 15,000-18,000 crore in March April, which would be as high as 30% of total costs of the raw material purchases.

They also say that the Centre had offered a similar bailout package of Rs 3,600 crore to sugar mills in December 2007 without these two conditions and no payment default was reported, seeking to draw attention to a clean history.

Asked about the status of an ISMA representation before the ministries of finance, agriculture and food earlier this month, the associations director-general Abinash Verma said he was unaware of any such decision by the ministries on these demands. Instead, I am hopeful that the government will take a positive step so that the payment to farmers can be made at the earliest. This year, mills started crushing cane under tremendous pressure and the timely availability of loans are crucial to their existence, he said.

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, which resulted in a delay in crushing by a month.

So, last month, the CCEA decided to offer the interest-free loans and interest burden, estimated at Rs 2,750 crore over the next five years, will be borne by the Centre from the Sugar Development Fund (SDF). Mills will have to repay the loans in five years, with a moratorium on repayment in the first two years.

Cane arrears in Uttar Pradesh up to January 28 this season that started on October 1 are Rs 5,571.58 crore, over and above those of Rs 1,331.96 crore in the last season, said an industry executive.

Assuming that sugar mills in Uttar Pradesh which have been hit the hardest due to what they term the states arbitrary fixing of cane rate when sugar prices remain subdued will get roughly 30% of the bailout package, the interest-free loans could benefit them by just about Rs 2.25 on purchases of a quintal of canes. Coupled with an incentive of Rs 11.03 per quintal in the form of a waiver of the purchase tax, entry tax and society commission, as announced by the Uttar Pradesh government, there would still be a huge gap between the viable cane rate of Rs 225 per quintal, which the industry says is in sync with the Rangarajan panel formula for cane pricing, and the state advised price (SAP) of Rs 280 per quintal for 2013-14.