Banks reduce lending to mills as sugar prices fall

KOLKATA | MUMBAI: Banks are turning cautious while lending to the sugar sector at a time when the sweetener’s prices are seeing a drastic fall amid spiralling cost of production.

The financiers are looking at extending credit to those mills which have allied businesses such as cogeneration and distillery. Sugar mill owners are worried that their drawing power from banks might be curtailed if prices continue to drop.

An official with a state-owned bank which lends to sugar companies such as Bajaj Hindusthan, Balrampur Chini and Renuka Sugars said that banks are normally careful in assessing the working capital limit by keeping in mind the market conditions for the purpose of risk mitigation.

The sanctioned limits are based mainly on cash flows and peak-level requirement. A company expects cash flows based on the material produced while peak-level requirements, in the case of a sugar mill, refer to the finance required when cane crushing is at its peak.

“If sugar prices are expected to be lower on account of increased production, banks would normally assess future cash flows expected from other revenue segments such as ethanol blending, molasses sales to wine producing units and for cogeneration,” said the official.

Allahabad Bank has an exposure of Rs 444 crore to the sugar sector. With the fall in prices, it has taken a decision to take a cautious step on sugar industry in current fiscal.

“Based on the Crisil outlook on the sector, we have decided to sanction finance to those companies which have alternative source of revenue generation,” said an official of Allahabad bank. Rajesh Srivastava, chairman and MD of Rabo Equity Advisors, a leading PE firm in the country, said PE investments will flow into those sugar companies which have entered into forward integration.

Kishor Shah, director-cum-chief financial officer of Balrampur Chini said: “Banks are expected to take harsh steps on the sugar industry in the current fiscal to avoid accounts becoming irregular.”

The fall in the price of sugar is creating a problem for mills which are solely dependent on the sweetener for generating cash flows. These mills depend on bank finance for meeting their working capital needs.

However, with the price of sugar falling below the production cost, the drawing power (from cash credit accounts) of these mills is likely to go down. The situation is turning particularly grim for sugar factories in Maharashra which are selling sugar at Rs 3 per kilo below the cost of production of Rs 27, raising the prospect of losses for them and bad debt for their lenders in addition to arrears for growers.

This was confirmed by Prakash Naiknavare, managing director of Maharashtra State Cooperative Sugar Factories Federation, the apex body for sugar cooperatives in the state.

“The fall in sugar prices has put many mills in the state in a spot and they could face margin calls from banks soon,” he said. There are 165 mills in Maharashtra of which a half are solely dependent on sugar for cash flows.

A company with robust cash flows tends to enjoy higher limits than those whose cash flows are strained. In the case of sugar mills which look for day-to-day capital, the stocks of sugarcane and the finished goods are hypothecated to the bank, which arrives at the limit after deducting a margin, which is the stake of the borrower.

The margin is usually in the range of 15-20%. So, in the case of a company, say, with a day-to-day need of Rs 100, the bank will retain Rs 15-20 as its margin. If the value of the company’s stock comes down to Rs 50, its limit will be reduced to Rs 35.

source: ET