For the first time in at least 10 years, major banks have refused to extend working capital loans to sugar firms in Uttar Pradesh, blaming high cane prices fixed by the state for the mills' persistent losses and stoking fresh uncertainties over crushing of the raw material this year.

In a letter to a leading mill, State Bank Of India said: "Since your company has been incurring huge operating losses for the last 2-3 years, basically due to a regulated pricing system of sugarcane in UP that leads to a situation where input costs are far more than sugar realisations, our bank is not interested in taking additional exposure to your company."

Echoing similar sentiments, Punjab National Bank has sent a letter to another mill saying: "The low cost of sugarcane in other states will not allow sugar prices to rise and the mills in UP don't have any choice but to sell sugar at subdued prices incurring operating losses."

Allahabad Bank has also refused to lend to a major sugar mill unless recommendations of the Rangarajan Committee, which has suggested that the cane price be fixed at 70% of the prices of sugar are implemented.

According to an Indian Sugar Mills Association (ISMA) estimate, mills in UP collectively incurred losses of R3,000 crore in the last marketing year through September and around R1,000 crore in the year before.

Confirming that Simbhaoli Sugars, too, has got a similar letter from its bank, Mann said: "Banks are asking how we are planning to repay the loans as well as interests when, even at last year's price, cane rates were 5% higher than the sugar prices in UP after factoring in transportation charges. And we are struggling to find any suitable explanation."

At R280 per quintal in 2012-13, the cost of cane alone stands at a whopping 105.40% of current ex-factory sugar prices, after taking into account a transportation charge of R20 per quintal and low recovery rate.

Mills in the state usually start crushing around Diwali and this year they have asked for at least a 14% reduction in the cane price from last year. UP is one of the states which fix very high cane prices, despite low recovery rates, to woo vote bases in the farming community.

Cane price accounts for around 70% of the cost of producing sugar.

At Rs 3,331 crore, the state accounted for 75.3% of the country's total cane arrears of Rs 4,424 crore until July 31, while Maharashtra had almost zero arrears.

Abinash Verma, the director-general of ISMA, asked: "When even big companies are not getting working capital loans, how will mills purchase cane this year? The only option is that the state government should announce a reasonable cane price this year."