The cabinet committee on economic affairs (CCEA) on Thursday approved modalities for extending interest-free loans worth R6,600 crore to bail out the sugar industry and hasten the process of clearing cane arrears.
Mills will have to repay the loans in five years, with a moratorium on repayment in the first two years. “(However) No interest subvention (is) to be provided for the period of default in the principal repayments,” an official statement said.
Last week, the CCEA had approved a proposal to provide the loans, although the amount was lower than the R7,200 crore recommended by an informal group of ministers headed by agriculture minister Sharad Pawar.
Moreover, the other recommendations of the panel, including doubling the limit of ethanol blending with petrol to 10%, incentives to produce up to 4 million tonne of raw sugar and to set up a buffer stock for the sweetener are yet to be taken up by the CCEA.
Earlier this year, sugar mills, especially in Uttar Pradesh, had expressed their inability to clear cane arrears due to an unprecedented liquidity crunch stoked by a drastic mismatch between prices of sugar and cane, which resulted in a delay in crushing.
Mills have to pay as much as R3,200 crore in cane arrears, with Uttar Pradesh alone accounting for roughly 75%.
After Thursday's CCEA meeting, food minister KV Thomas said the interest burden on the loans, estimated at R2,750 crore over the next five years, will be borne by the Centre from the Sugar Development Fund (SDF), he said.
The loans would be disbursed through a separate bank account to strictly ensure the utilisation of money. The finance ministry will issue orders to banks, including for the appointment of a nodal bank, for the lending process to start, he added.
The loans will be provided by banks to sugar mills exclusively for making payments to sugarcane farmers, including arrears. The loans would be equivalent to the excise duty, cess and surcharge on sugar paid by the mills over the past three years. Mills that are operational in the sugar season that started on October 1 will get the loans.
Sugar mills with loans classified as non-performing assets by the banks will also be eligible for the credit if the state governments concerned give guarantee for the new loans. Following the notifications, all loans sanctioned by June 30 next year and disbursed by September 30, 2014, would also be covered under the interest subvention facility, Thomas said.
The lending will be subject to various norms relating to scrutiny, cash flows of the next five years, establishing the viability and debt servicing capacity and conduct of loan, including the restructuring guidelines as notified by the RBI for the sugar industry from time to time.
The loans will be backed by security and collateral of the sugar mill availing it, including personal guarantees and other assets of promoters which are free from encumbrances, to be decided by the individual banks.
Assuming that sugar mills in Uttar Pradesh — which have been hit the hardest due to what they term the state's arbitrary fixing of cane rate when sugar prices remain subdued — will get roughly 30% of the bailout package, the interest-free loans will benefit them by just about R2.25 on purchases of a quintal of cane.
Coupled with an incentive of R11.03 per quintal in the form of a waiver of the purchase tax, entry tax and society commission, as announced by the Uttar Pradesh government, there would still be a huge gap between the viable cane rate of R225 per quintal, which the industry says is in sync with the Rangarajan panel formula for cane pricing, and the state advised price of R280 per quintal for 2013-14.