Banks cautious on further lending to sugar companies

Sources:BS/Ajay Modi / New Delhi March 18, 2010, 0:24 IST

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. Companies borrow against sugar

stocks to pay sugarcane farmers.

In January, a number of companies got advances against a valuation of Rs 3,600 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 Rs 3,100 a quintal, says an industry source. Consequently, the drawing limit of companies has come down by nearly 14 per cent.

“We are facing working capital problems. While sugar realisation is low, we are still paying Rs 260 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 Rs 260 a quintal and a 20 per cent levy of sugar at Rs 1,300-1,400 a quintal — is Rs 3,600 a quintal.

Banks allow companies to draw 85 per cent of the total value of sugar meant for open market sale. However, for 20 per cent of the sugar (which is sold to government for levy at a fixed price), companies can draw 90 per cent 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 Rs 4,300 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.

The low sugar realisation has been reflecting in the share price of top sugar companies.
Most sugar stocks have fallen sharply from their 52-week high in the month of January.

At the Bombay Stock Exchange, Bajaj Hindusthan has
corrected over 39 per cent to Rs 146.75 from its 52-week
high of Rs 242.90 on January 7. Dhampur Sugar has
corrected over 49 per cent to Rs 79.80 from its 52-week high of Rs 158.60 on January 11.