Several cooperative banks in Maharashtra are in a piquant situation, thanks to Maharashtra government’s decision to conduct revenue recovery proceedings against sugar mills that fail to pay up Fair and Remunerative Price (FRP). Around 12 district cooperative credit banks (DCCBs) and the Maharashtra State Cooperative Bank (MSCB) have lent to the sugar mills this season.
PR Karnad, MD, MSCB, said that the entire pledge loan could be in jeopardy because of the action taken against the sugar mills. Senior officials in the Maharashtra State Cooperative Sugar Factories Federation (MSCSSF) said that this is likely to lead to litigation.
“As per procedure, mills pledge their stocks to banks and pledge cash credit is sanctioned against the inventory. If the government ends up sealing stocks, this could become a problem for the banks. Once sugar is produced, the stocks are kept in a godown under the custody of the bank, the keys of which are with the bank godown officer and these are released when the mill deposits the money in the pledge account against the sale of the sacks,” officials explained. The sale happens after the mills issue a tender and take the advance payment from the trader against the stocks.
As on date, sugar prices are at R2,390 per quintal ex mill, which is R40 less than the valuation given by the apex bank. Senior bank officials explained that the mills will be required to deposit the gap of R40 per quintal in the bank. Sometimes, the banks do not insist that this gap should be paid upfront in view of the current crisis in the industry. However, this gap has to be made good at some point in the season, officials said. MSCB has valued the sugar at R2,430 per quintal and leaving a 15% margin to cushion any possible fall in prices, the pledge rate is R2,065 per quintal. Of the pledge rate of R2,065 per quintal, R550 goes towards bank recovery on the loan account, R1,305 towards cane payment to farmers and R250 is taken as harvesting and transportation cost.
MSCB has sanctioned working capital of R3,135 crore to 30 odd sugar factories in Maharashtra with positive net worth for the sugar season of 2014-15. Last year, the bank had sanctioned R3,200 crore working capital to sugar factories in the state. The remaining 12 DCCBs have also sanctioned pledge cash credit and working capital to mills this season.
According to experts, what is happening now is that with falling sugar prices and the threat of revenue recovery proceedings, sugar mills are ready to sell stocks at lower rates and the gap of the valuation could increase as the season progresses and this could cause problems at the end of the season. The working capital loans are usually given for the period from November 1, 2014, to October 31, 2014. The pledge limit is around R3,135 crore and as production begins, the mills will begin drawals. When contacted, Sugar Commissioner Vipin Sharma cited the example of the SC directive in the UP Sugar mills case saying the first priority is always for cane payment.