INDIA: Banks become cautious in lending to sugar companies
Published: 03/18/2010, 11:32:42 AM
Banks have become more cautious in lending to sugar companies following a sharp fall in prices and are working on a fresh set of borrowing limits based on lower valuations, according to India's Business Standard newspaper.
Companies borrow against sugar stocks to pay sugarcane farmers.
In January, a number of companies got advances against a valuation of INR3,600 (US$79.1) a quintal for their sugar inventories. While granting limits to sugar companies, banks take into account the previous three-month average price or the current price, whichever is lower. However, banks are now adjusting the drawing limits to the current sugar price of INR3,100 a quintal, says an industry source. Consequently, the drawing limit of companies has come down by nearly 14%.
"We are facing working capital problems. While sugar realisation is low, we are still paying INR260 a quintal for sugarcane. We apprehend that some sugarcane payment arrears will build up if sugar prices do not improve. This would adversely affect the farming community and sugarcane acreage might not increase significantly. This would again lead to import dependence in the sector," said an official of a Uttar Pradesh-based sugar major.
Most sugar companies claim that the cost of sugar production - considering the existing rate of sugarcane at INR260 a quintal and a 20% levy of sugar at INR1,300-INR1,400 a quintal - is INR3,600 a quintal.
Banks allow companies to draw 85% of the total value of sugar meant for open market sale. However, for 20% of the sugar (which is sold to government for levy at a fixed price), companies can draw 90% of the total value. "We have elaborate norms for lending to sugar companies and the adjustments are done keeping in view such norms," said an executive with a nationalised bank.
On actual sale of sugar, companies repay the amount to banks on a regular basis. Banks, on their part adjust the limits on a weekly basis and companies are required to submit a weekly statement of stocks to the banks.
Ex-mill sugar prices had touched a record high of INR4,300 a quintal in January. Prices, however, started softening towards the end of January and continued to decline in February following government initiatives - like weekly sale mechanism and stockholding limits - and a decline in international prices.
However, companies continue to pay the same price to farmers as they were paying in January. Moreover, with extended crushing in states like Uttar Pradesh and Maharashtra, most companies have already exhausted their drawing limits. And with a decline in their drawing power some sugarcane arrears might build up.