Textile debt recast flops as mills fight to avoid NPA tag

Written by Banikinkar Pattanayak | New Delhi | Updated: Jan 18 2013, 06:39am hrs
A second restructuring makes them NPAs, depriving them of benefits under TUFS and pushing up borrowing costs

The much-touted debt recast scheme for textile companies seems to have come a cropper. Roughly half of the 307 textile mills which had sought a restructuring of loans worth over R12,000 crore last year are losing interest after the Reserve Bank of India (RBI) declined to ease norms on non-performing assets (NPAs), senior industry executives said.

Since most of these cash-starved mills had already been granted this facility during the 2008-09 financial crisis, any further restructuring would render their loans NPAs and deprive them of subsidy and benefits extended under the textile upgradation fund scheme (TUFS). Despite a slight pick-up in demand for textile products of late, as many as 91 of the 276 listed textile firms suffered losses in the first half of the current fiscal, although the situation was still better than a year earlier when 120 firms had recorded losses.

Many of these mills especially the relatively larger ones are either taking corporate loans at high interest rates or trying to garner funds from other sources to stay afloat. The reason is, a mill seeking second debt restructuring will take at least 2-3 years to get out of the NPA trap and until then, it will not get benefits under the TUFS. Moreover, their future borrowing costs will also rise as their risk potential would increase due to the NPA factor, said DK Nair, secretary-general of the Confederation of Indian Textile Industry (CITI).

Senior industry executives said roughly 40% of the 307 textile units are based in southern India. Big mills including Alok Industries, Arvind Mills, Century Textiles & Industries, Vardhman Textiles, Trident and Welspun dont feature in this list.

Last year, the ministries of finance and textiles had agreed on a restructuring of textile sector loans worth R35,000 crore to bail out cash-starved mills which fell into a debt trap due to the sudden fall in product prices after two years of steady rise in raw material costs. However, after the RBI declined to tweak its prudential norms which stipulate that repeated instances of debt restructuring be declared NPAs, the finance ministry had asked respective banks to consider these cases at their end even though no concession on the NPA front came by.

Only a few proposals have been cleared by banks now, and around two-thirds of cases are still under consideration. The process will be expedited, said a senior government official.

The textile industry has now requested the government to consider easing guidelines under TUFS to allow concessions to even those mills whose loans have been declared NPAs due to the second restructuring, Nair said.

The government mainly provides interest subsidy against loans to textile units, apart from capital subsidy as well as limited cushion against exchange rate fluctuation, for investing in new technology at existing units as well as to set up new units with state-of-the-art technology so that their viability and competitiveness in the domestic as well as international markets would be enhanced. The government has allocated R11,577 crore for the 12th Plan period (2012-17) for the TUFS.

Textile mills, which bought cotton at record prices in the marketing year which started on October 1, 2010, were caught off-guard when product prices plunged in April 2011 on poor demand from the United States and the European Union, which account for around 65% of textile exports. Moreover, the governments restrictions on cotton yarn export at 720 million kg in the 2010-11 fiscal to boost domestic supplies resulted in a loss of R11,000 crore to the textile industry, according to an estimate by CITI.