Financial crisis for sugar mills

Unable to repay working capital loans due to a fall in prices, many small and medium ones to face problems in the coming season.

Around 300 small and midsize sugar factories, representing 40 per cent of India’s 24.2 million tonnes of output, face a financial crisis due to losses in cane crushing. The situation is likely to worsen in the ensuing season.

In the first eight months of the current sugar season beginning October 2010, banks lent working capital to mills based on an estimated average price of Rs 2,800 per quintal, the then prevailing spot market price. On Monday’s average price, according to Narendra Murkumbi, president of the Indian Sugar Mills Association (Isma) is Rs 2,350 per qtl. Since the loans were made on the basis of the earlier price, the banks want the deficit to be made good by either cash or more collateral.

Isma says the total loss for mills so far this season is Rs 3,200 crore, at an average of Rs 400 crore per month, due to the dramatic fall in spot prices. “Many small and midsize sugar factories may not start crushing next season due to the lack of working capital,” said Murkumbi.

The condition is alarming for mills in Maharashtra, India’s largest sugar producing state. Most small and midsize factories are not in a position to repay the working capital loan etended at the start of the season. Nearly a fourth of the state’s estimated nine million tonnes of output remained unsold.

A senior official from Bank of Maharashtra (BoM), said, “Many sugar mills have approached us for credit support for the new season. But this is a low priority area (for us).” BoM is the convenor of the State Level Banking Committee, with a 30 per cent share of the total lending in Maharashtra. The lending for crop loans will be disbursed up to 51 per cent by commercial banks and the balance through cooperative banks.

“There is no way for a recovery in sugar prices in the remaining four months of the current and the next full sugar year. The cost of production is unlikely to decline from this level. Which means mills will continue to remain under financial stress and face huge constraint for working capital during the next season, beginning October,” said Prakash Naiknavare, managing director of the Maharashtra State Federation of Cooperative Sugar Factories.

Average ex-mill realisation remained at Rs 2,450 per qtl through the first eight months of the current year, while the average cost of production is Rs 2,700 per qtl. This means sugar factories are losing Rs 250 per qtl for every tonne of output.

During the ongoing sugar season, 167 mills were registered with the state government. Most of these mills meet their working capital requirement from cooperative sector banks. Of the total, 67 mills reported healthy financial capability. The remaining 100 may not start crushing due to the lack of working capital.

Government support, such as the earlier excise load scheme announced in similar circumstances in the past is the only protection, said Sanjay Tapriya, director, finance, at Simbhaoli Sugar Mills.