Concerned about loans turning bad due to a faulty cane pricing policy in Uttar Pradesh, banks have asked promoters and directors of sugar mills, especially the smaller ones, to give their personal guarantee besides sugar stock as collateral to get fresh working capital advances, according to bankers and industry executives.

Bankers said the absence of a reasonable cane pricing formula — which has made sugar operations “unviable” in UP — was to be mainly blamed for the industry’s inability to service debt. Moreover, banks’ fears about a spurt in non-performing assets (NPAs) worsened after the Supreme Court in October upheld the Allahabad High Court’s order that farmers would have the first right over realisation from sugar sales, and not the lenders. “After the SC verdict, banks are now virtually forced not to reckon sugar as security. Mills are compelled to sell sugar stock, even below costs, to clear cane arrears, and banks no longer have the first right over proceeds from sugar sales, as was the case earlier. That’s why we are asking for personal guarantee from promoters or some other directors of sugar companies should they want loans, but many of them are reluctant to offer it,” a senior official with the Punjab National Bank told FE.

SBI and PNB are the top two lenders to the UP sugar industry and have between them an exposure of Rs 5,000-6,000 crore.

Executives of some sugar mills said since some promoters themselves are facing a liquidity crisis, they are unable to furnish personal guarantee for loans. Already, around 30% of the mills in UP, especially the smaller ones, are yet to get working capital loans this season.

Since banks are reluctant to lend and the mills are mandated by the UP government to pay farmers bulk of the cane price amount (Rs 240 per quintal) within 14 days of purchases, most factories are being forced to sell sugar even in a falling market. Already ex-mill sugar prices in UP have hit over three-year lows, falling below even the cost of cane needed to produce the sweetener. Mills are yet to pay around Rs 2,000 crore to farmers for cane purchases for last and the current seasons.

Late last year, SBI chairperson Arundhati Bhattacharya and then PNB chairman KR Kamath had written to UP chief secretary Alok Ranjan to urgently finalise a cane pricing formula, factoring in interests of all stakeholders.

In the letter, Bhattacharya had warned banks wouldn’t be able to lend to mills unless the state implemented the Rangarajan formula, linking prices of cane to sugar and other by-products and that 75% of the sugar price is to be paid to farmers for cane supplies. She also said the government should consider offering subsidy to mills in accordance with a policy by the state government implemented in 2004 but was suspended abruptly in 2007 leaving mills that had taken loans to invest heavily cash-strapped.

Mills in UP already incurred around Rs 7,250 crore in losses for the three years through 2013-14 as returns from sugar sales failed to keep pace with the state-advised price (SAP) for cane fixed by the UP government, which, at Rs 280 per quintal, was 27% higher than the benchmark rate set by the Centre.