The Maharashtra government on Tuesday (September 22) agreed to be the guarantor for 32 sugar mills to avail pre-season loans.
In doing so, the government diluted its own norms for providing guarantees to sugar mills, and burdened the cash-strapped exchequer with expected contingent liabilities of Rs 391 crore. The approval came into force on Thursday (September 24).
Why did the government agree to guarantee the loans of these 32 sugar mills?
The government has argued that this was necessary to “ensure that all the cane is crushed in time” so that sugarcane farmers get the benefits. The state cooperatives department is anticipating a bumper cane crop this year.
The decision was taken by a Cabinet sub-committee headed by Deputy Chief Minister and Finance Minister Ajit Pawar. The measure was necessitated to ensure that financially stressed sugar mills are able to operate ahead of the crushing season beginning October 20.
The sugar industry has significant clout with Chief Minister Uddhav Thackeray’s Maha Vikas Aghadi government, 16 of whose 43 ministers have direct links with cooperative or private sugar mills.
How does a government guarantee help the mills?
The government guarantee is only for cooperative sugar mills. Ninety out of the 180 sugar mills that are currently functional in Maharashtra are cooperatives; the rest are privately owned. The government had received proposals seeking financial support from 38 of the 90 cooperative sugar mills.
After scrutiny, the government agreed to give guarantees to 32 of these mills. Once the government becomes a guarantor, the sugar mills can access loans from the Maharashtra State Cooperative Bank or district cooperative banks. In the absence of a state guarantee, these banks cannot give loans to sugar mills with a negative worth, as per the guidelines of NABARD and RBI regulations.
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Why is the loan important, and how will banks recover their money?
The state government is a facilitator, but the onus of repayment lies with the sugar mills. But once the mills take the loans from banks, they will have to repay them by May 31, 2021. If there is a surplus of cane for which an extended crushing period is required, the repayment deadline can be extended until June 15.
The pre-season loan is important for financially weak banks, which cannot otherwise commence operations. Ahead of the crushing season, a sizable sum of money is invested in the revival and management of mills shut down after the previous season. More importantly, the sugar mills have to make advance payments to contractors who provide the farm labourers.
Why are sugar mills in financial difficulty?
Multiple reasons have been attributed. Mill owners often complain that the centrally-mandated fair price renumeration to cane cultivators is unrealistic. But mismanagement and the lack of transparency in the running of the mills are serious problems.
The political class is deeply entrenched in the sugar industry, and there is corruption, including the diversion of loans from cooperative banks, and misuse of funds to serve personal vested interests.
Price fluctuations in the international market also impact the financials of the mills. However, some 50-55 cooperative mills are making profits.
According to the sugar commissioner’s assessment, some 170 lakh metric tonnes of sugarcane will be processed in the 32 sugar mills that the government has committed to help. The mandatory fair price renumeration to farmers is currently Rs 2,850 per metric tonne — which adds up to Rs 4,800 crore for 170 lakh tonnes of cane, payable to approximately 2 lakh farmers.
Sugarcane cultivation in Maharashtra this year is on 10.50 lakh hectares, and involves 20 lakh cultivators. Production in the current season is estimated at 815 lakh metric tonnes.
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