The finance ministry expects banks to start sanctioning interest-free loans to bail out the cash-strapped sugar industry by February end, as applications keep coming, official and banking sources said on Monday.

The process of sanctioning loans will be over by June and the disbursal is expected to be completed by September this year, one of the sources told FE.

Sugar mills had submitted applications to obtain interest-free loans of around Rs 3,500 crore until last week from the Rs 6,600-crore bailout package approved by the Cabinet Committee On Economic Affairs (CCEA) in December.

Following mills' demand to hasten the process, the department of financial services (DFS) in the finance ministry on Friday convened a meeting of banks, including State Bank of India, Bank of India, Indian Overseas Bank, Andhra Bank, Bank of Maharashtra and Bank of Baroda. The DFS also sought details on the number of applications filed, whether the banks have refused loans to any of the millers and by when the process of sanctioning and disbursal is expected to be over, they added.

However, there has still not been any rethink on relaxing the eligibility criteria for availing of loans, as sought by the sugar industry, the sources said. The chief of a public sector bank, which is one of the main lenders to the sugar industry, said: "Only the applications found eligible as per the guidelines will be considered. We are following the guidelines strictly. This was emphasised at the recent meeting with the finance ministry."

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 the prices of sugar and cane. So, in December, the CCEA decided to offer the interest-free loans and interest burden, estimated at Rs 2,750 crore over five years, will be borne by the Centre from the Sugar Development Fund. Mills will have to repay the loans in five years, with a moratorium on repayment in the first two years.

FE had reported last week that the DFS had written to the Indian Banks' Association saying lending will be subject to various norms relating to security, future cash flows for the life of loan (five years), establishing the viability and debt servicing capacity and conduct of loan, including the restructuring guidelines as notified by the Reserve Bank of India for the sugar industry from time to time.

Mills whose loan accounts have turned into NPA are also covered under the scheme, provided the state government concerned gives its guarantee for their new loans.

Mills are, however, hopeful the DFS will reconsider its stand and come out with a favourable decision for them, arguing that if sugar companies were so stable financially that they could take loans on commercial terms, they wouldn’t have approached the government for a bailout in the first place. They also say interest-free loans shouldn’t be treated on a par with usual loans as the government has mandated that the funds be used exclusively for payment of cane arrears to farmers, and not for any other business transaction.

The Indian Sugar Mills Association (ISMA) has warned that cane arrears may hit a record Rs 17,000-18,000 crore by the end of March across states and any delay in disbursing loans will be disastrous for mills. Worse, arrears are expected to pile up at an even faster pace from end-February onwards, as the mills, which usually use up cash reserves in the first 2-3 months of crushing, are unable to ease sugar stocks significantly this year, ISMA director-general Abinash Verma had said last week.

According to a rough estimate by the ISMA, cane arrears as at the January of touched Rs 10,000 crore, of which Uttar Pradesh alone accounted for Rs 7,200 crore, including last season's dues of Rs 900 crore.