Cotton textile cos’ losses may affect banks

In a recent report, Fitch Ratings noted that while the Indian government’s 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 Fitch’s 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

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