Loans worth Rs 2,751-crore were disbursed to sugar mills by mid-May, out of a total of Rs 6,600 crore approved by the government in December to be offered to the cash-starved mills with a 12% interest subvention, official and industry sources said on Thursday.

As many as 353 mills applied for the loans until May 15, of which loans to the tune of Rs 4,200 crore were sanctioned by then, they added. Banks are required to complete the process of sanctioning loans by June and the disbursal by September.

The loans with interest subsidy are to be used exclusively for clearing dues for cane purchases during the marketing year through September 2013 as well as this year.

As of March 31, sugar mills owed farmers Rs 15,000 crore for cane purchases, with Uttar Pradesh accounting for around 70% of the dues, according to the data by the Indian Sugar Mills Association (ISMA). Mills usually clear cane dues using proceeds from sugar sales or working capital loans or reserves.

However, there has still not been any rethink on relaxing the "stringent" eligibility criteria for availing of loans as sought by the sugar industry, and loans are being sanctioned only to those fulfilling all the norms, said the bankers. Industry executives have said many mills, which are already stressed and are in need of subsidised loans more urgently than some others, may not get the relief.

While some banks are charging higher interest rates, even up to 15%, from mills falling in the high-risk band, others are considering them ineligible, said a banker.

In January, the department of financial services had written to the Indian Banks' Association, saying lending would 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, conduct of loan including the restructuring guidelines as notified by the RBI for the sugar industry from time to time.

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

Public sector bank (PSB) officials said that other than providing the interest subvention to eligible mills, the loans are being treated like any other ordinary loans.

They said banks were making sure that loans would be given only to those mills with a good repayment record. As several banks are already saddled with NPAs owing to an economic slowdown, banks don't want to take any chance with defaulters. For their part, mills say the government should ease the eligibility criteria for availing of loans.

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. So, in December, the cabinet committee on economic affairs decided to offer the interest-free loans and interest burden, estimated at Rs 2,750 crore over five years, would 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.

However, the delay in crushing in Uttar Pradesh and some other parts of the country by almost a month affected sugar production as many farmers sold cane to other consuming industries, including jaggery makers.

The country would produce 23.8 million tonnes of sugar in 2013-14, down 5.3% from a year before, according to an ISMA forecast. However, the production level this year would still exceed an expected consumption of 23.5 million tonnes, keeping supplies steady. Still, the drop in output may slightly improve realisation of mills, already running at huge losses, on sugar sales, as they will be in a better position to cut a glut in the market following years of surplus production.