Banks shy of financing sugar industries

Banks and other lending institutions are shying away from financing expansion projects in the sugar industry, which is already in doldrums.

Oudh Sugar, a K K Birla Group company was setting up a 7,000-tonne crushed daily (tcd) capacity greenfield sugar unit near Gorakhpur in Uttar Pradesh with an investment of Rs 350 crore. The unit was scheduled to begin crushing in the 2007-08 sugar season beginning this October. However, the stringent lending norm imposed by the financing bank has forced the company to put the project on hold.

"When the bank sanctioned the scheme, the sector's situation was comparatively better. The first instalment was released, but thereafter the bank demanded the proprietor's personal guarantee for the loan, which could not be given," said C B Patodia, advisor, Birla Group of Sugar Companies.

However, the company is setting up a 35 mw cogeneration unit at the site for which a power purchase agreement has been signed with the UP Power Corporation.

Interestingly, the inability to proceed with the expansion plan has turned a boon for the company. "In a way, the inability to expand will help us because at the current cane price and sugar realisations, producing more sugar would mean higher loss for any sugar mill," added Patodia.

The sugar industry is facing its worst crisis where mills are not even able to recover the cost of raw materials. This year's production, at 28 million tonnes, is 45 per cent higher than last year's 19.2 million tonnes.

Consequently, sugar prices have crashed and most companies have seen a loss in the past two quarters. Most sugar stocks are trading at an all time low.

Mills have not been able to pay the cane prices to farmers. In Uttar Pradesh, for instance, mills owe Rs 1,500 crore to farmers. And the worst is yet to come. Prices are expected to fall further with yet another record production, projected at over 29 million tonnes for the 2007-08 year. Annual domestic demand hovers around 20 million tonnes. These factors have prompted bankers to regulate their lending to the industry.