The Hindu Business Line : Sugar mills unlikely to get fresh credit from banks

The ensuing 2007-08 sugar season (October-September) may witness something unprecedented in Uttar Pradesh (UP) — a piling up of cane arrears from day one and farmers offering their crop to mills on credit.

The reason for this is quite simple. As on August 31, UP mills have paid growers only Rs 9,117.55 crore out of the total Rs 11,010.66 crore worth of cane bought during the current 2006-07 season. That leaves a balance of Rs 1,893.11 crore still to be discharged on the cane crushed in this season by June.

Biggest problem

“When the new season starts, we will have growers already being owed Rs 15 for every Rs 100 payable to them from the current season. Where is the question, then, of paying them for the new cane that is supplied from October?”, a miller pointed out.

For the factories, the biggest problem right now is a severe working capital squeeze. Most of them have overdrawn from banks against existing sugar stocks, the value of which has suffered erosion with average ex-factory realisations plunging from Rs 1,700 per quintal in October to Rs 1,500 in January, Rs 1,400 in April and Rs 1,250 now.

Banks normally extend cash credit limits to mills up to 85 per cent of the value of their stocks. Every dip in realisations has led to a corresponding fall in the drawing power of mills or their over-drawing against existing limits.

Cane price

At current values, the mills can draw only about Rs 1,050 per quintal against their stocks, whereas the equivalent cane price alone (fixed by the State Government, exclusive of purchase tax, society commission, and so on) comes to Rs 1,250 per quintal.

But that’s not all. “Since our existing sugar stocks are already pledged with the banks, what do we now borrow against for procuring the new cane?” the miller quipped.

In fact, some banks have already refused to extend fresh working capital to mills, given the fall in their sugar inventory values and the prospect of further depreciation in the days ahead. The State Bank of India and Punjab National Bank are among those with maximum exposure to the sugar industry.

Only way

With bank credit drying up, the only way to run the mills is not to pay the growers. In other words, the latter would supply cane on credit, effectively filling the void left by the banks.

Alternatively, the mills might not crush at all, even if it risks the Rs 6,000 crore-odd invested in the State’s sugar sector over the last three to four years. UP is likely to produce over 90 lakh tonnes of sugar in the coming season, against 85 lakh tonnes in 2006-07.

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