Cotton textile cos’ losses may affect banks

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SummaryThe cash losses being run up by the Indian cotton textile companies will hit their debt servicing capacity, creating more pain for Indian banks.

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 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 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,

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