» Business » Why banks are unwilling to support the sugar industry

Why banks are unwilling to support the sugar industry

By Bhupesh Bhandari and Sahil Makkar
March 14, 2015 08:34 IST
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Sugar mills in UP owe thousands of crores to cane farmers. Banks are unwilling to lend to the sector. Bhupesh Bhandari and Sahil Makkar  dissect the festering agrarian-industrial-social problem.

A sugar baron from Uttar Pradesh recently decided to check into an upscale hospital in Delhi's suburbs.

Armed with a warrant on his name, cops from Uttar Pradesh had searched his farmhouse and office. To evade arrest, he would have to spend the night away from home, and the hospital, he thought, would be a sanctuary.

The moment he reached the hospital, he found it swarming with policemen from the state - a political heavyweight had got admitted a short while ago. He fled the place.

Fear has gripped the sugar industry of Uttar Pradesh.

Squeezed between high sugarcane prices mandated by the state government and falling sugar prices, the mills have run up massive arrears to farmers.

Naturally, farmers are restive. Some mills allege their personnel - and their families - have been manhandled by the farmers. As sugar - as well as sugarcane - comes under the Essential Commodities Act, the state government is well within its powers to launch criminal proceedings if arrears are not paid, which can include arrest.

Engineers and technicians are leaving the mills in droves. So much so that mills are finding it difficult to appoint an "occupier", the man responsible for payments to the farmers.

Directors are nervous about serving on the board. One of the companies, Mawana Sugars, which owns three mills in Uttar Pradesh, has seen most of its directors depart.

On Tuesday, Mawana Sugars informed the state government that it would not be able to run the factory anymore "in the absence of trained and experienced professionals".

"No director or senior officer," the company said in its letter, "is willing to work as all of them, including their families, are feeling unsafe." It is, mind you, a decision fraught with danger. Mills cannot shut down when they want - they can do so only when the district magistrate allows them to do so. Violation of this law can invite a criminal case.

The Uttar Pradesh government has told Mawana Sugars that its act is illegal and will hurt the interests of farmers.

According to Uttar Pradesh Cane Commissioner S C Sharma, the company has agreed to restart operations. Political parties have decided to make capital out of it. Imploring the state government to take action against the "errant" mill owners, Laxmikant Bajpai of the Bharatiya Janata Party, or BJP, suggested in the state assembly earlier this week that they should be taken into custody immediately, saying that once the mosquitoes attack them in the jail, their wives would come running with the money!

On September 5, the Allahabad High Court had asked the mills to liquidate their sugar stocks and clear the arrears for 2013-14, which at that time stood at about Rs 4,600 crore.

The mills failed to clear the due fully, which prompted V M Singh, convener of the Rashtriya Kisan Mazdoor Sangathan, to accuse the mills of contempt of court.

On February 25, the Allahabad High Court directed the district magistrates to take strict action against the mills that had defaulted on the payments to farmers.

Three companies - Mawana Sugars, Modi Industries and Simbhaoli Sugars - still owe farmers about Rs 430 crore. For under Rs 75 crore, you could, theoretically, acquire four very large sugar companies: Oudh Sugar Mills (market capitalisation: Rs 46 crore), Upper Ganges Sugar (Rs 38 crore), Mawana Sugars (Rs 33 crore) and Simbhaoli Sugars (Rs 32 crore).

These purchases could make you the absolute monarch of the Indian sugar market. Sugar stocks may be at their historic low, but there are no buyers - such is the sentiment in the industry.

"You can think of an exit only when there are people ready to enter the sector," says Simbhaoli Sugars Managing Director Gursimarn Mann. One mill owner confides that he is ready to sell his company for Rs 1.

Wave Industries, which had acquired a sick mill from the Uttar Pradesh government some years ago, has offered to give it back.

As its sale has been challenged in the courts, over allegations of impropriety, the company is unable to make investments to upgrade and modernise the mill, which has resulted in losses of up to Rs 300 crore.

Much of the pain is caused by the free fall in sugar prices: from Rs 31 a kg four months ago to Rs 25 now, thanks to the bumper sugarcane crop sown by farmers last year.

The mills say that at this price, they cannot pay more than Rs 195 a quintal for sugarcane. However, the price fixed by the Uttar Pradesh government is Rs 280 a quintal. (Of this, Rs 240 has to be paid immediately, and the remaining Rs 40 after a few months.)

The state government had promised a subsidy of Rs 40 a quintal in case sugar prices fell below Rs 31 a kg. So far, only Rs 11.40 has been paid. But more could be on its way. Uttar Pradesh has provided for Rs 1,100 crore as sugarcane subsidy in its budget for 2015-16.

Will that be enough? The sugarcane arrears for the 2015-16 crushing season (which normally starts in October and ends in April), calculated at Rs 240 a quintal, now total Rs 6,051 crore. At Rs 280 a quintal, the arrears stand at Rs 8,380 crore.

The sugar industry has for long asked the state to link sugar and sugarcane prices - higher the price of sugar in the market, higher the price should be at which mills buy sugarcane from farmers and vice versa.

The suggestion has not found favour with the Uttar Pradesh government, though Maharashtra and Karnataka have adopted it. Banks too have started to shun the industry. In its September order, the Allahabad High Court ruled that farmers would have the first right on the sugar stocks of mills, and only after their arrears had been settled would the banks' turn come.

Mills are now required to deposit all the money from sugar sales into a designated account, from which 85 per cent goes to the farmers under the supervision of the district magistrate, leaving only 15 per cent to pay creditors and employees and do the maintenance work.

Alarmed at the situation, State Bank of India Chairman Arundhati Bhattacharya and Punjab National Bank Chairman KR Kamath wrote to the chief secretary of Uttar Pradesh, Alok Ranjan, that the state should rationalise sugarcane prices or else loans to sugar mills would turn bad. Unless the "financial viability of the sugar industry is restored by the state government, banks will not be able to provide any further facilities to the sugar industry in Uttar Pradesh," Bhattacharya said in her letter.

The state government did not take kindly to her suggestion. Ranjan wrote to the Union finance ministry on the need to convey to the banks that "any interference in the state's internal policy matters is not appropriate" as it vitiates the situation in the sugar sector "with which lakhs of farmers are associated" and could "potentially agitate them".

Mills say that banks, as expected, have turned off the working capital tap, which has constricted their ability to pay the farmers.

Ganga Ram, 60, stands in the long queue of bullock carts, tractor trolleys and trucks loaded with sugarcane winding into a mill owned by Simbhaoli Sugars in west Uttar Pradesh. In the next few hours, his entire produce will get crushed. Still, he doesn't know how to make ends meet because he hasn't been fully paid for last year as well as this year, which has forced him into debt. Ram owns five acres of farmland in the nearby Ladpur village and has a total debt of Rs 4 lakh against sugarcane dues of Rs 3.5 lakh. "I have not paid the school fees of my grandchildren, let alone pay the medical expenses of family members," says Ram, a tear rolling down his unshaven face.

The payments crisis is showing up in several other ways too. Many farmers have delayed marriages in their families.

Companies say people in the sugarcane-growing villages are buying fewer tractors, motorcycles, implements and television sets. Since west Uttar Pradesh is a political tinderbox, and now also communally divided, the administration cannot afford to take their complaints lightly.

D P Singh, the bureaucrat who exercises jurisdiction over Mawana Sugars, says his officers have registered four criminal cases against top company officials.

According to the first information report of March 8, which has been reviewed by Business Standard, "the farmers' money is being misused and their act is causing economic exploitation of the farmers. This has created anxiety among farmers, who are continuously protesting. It is having an adverse impact on the law and order situation in the district."

For its part, the state administration has started the process of attaching the company's 40 hectare of land, and sugar and molasses stocks in order to recover the 2013-14 dues of Rs 240 crore.

"We have sealed their warehouses and will auction their moveable and immovable property on March 16.

The proceeds will be used first to pay the farmers and then the banks," says junior revenue officer Rakesh Kumar Tyagi. But many, including Tyagi's colleagues, believe the assets will remain unsold in the absence of a buyer.

The farmers are running out of patience. Last month, the police arrested two farmers for allegedly causing a ruckus on the premises of the sugar mill. Outside the factory and elsewhere, many farmers have been protesting for over two months for their sugarcane dues.

"There is no communication between the mill and us. We are told the mill is unable to pay because of a slowdown in the prices of sugar," says Tikam Singh of Khatki village in Mawana.

"If other mills can pay, why can't Mawana Sugars? It is because the money is being diverted for other purposes," alleges Vijay Pal Singh of Kishanpur Birana village. There are about 50 million people in Uttar Pradesh who depend on sugarcane for their livelihood.

This makes it politically sensitive. Some in Lucknow, the state capital, feel the BJP government in New Delhi wants the crisis to fester till 2017 when the next assembly elections are due.

That may be conjecture but it is true that the Centre did not help by waiting for five months to allow export of 1.4 million tonne of raw sugar towards the end of February: as it comes at the close of the crushing season, and because international prices have tumbled over 20 per cent, it won't cause any improvement in domestic sugar prices.

The industry now wants the government to allow export of white sugar as well. The political dividend of high sugarcane prices is too high for the state to link sugarcane and sugar prices.

But there is no concrete evidence that higher sugarcane prices translate into votes. Mayawati, when she was the chief minister from 2007 to 2012, ordered the maximum increase in sugarcane prices, yet lost the assembly elections in 2012.

The current Samajwadi Party government has kept the price high but got decimated by BJP in the 2014 general elections. In spite of all the problems, farmers are still planting sugarcane over large areas.

"We have no other option except to grow sugarcane because it is a sturdy crop that can bear the hailstorm and rains," says Sansar Pal, a farmer from the Hapur district.

Others feel that notwithstanding the arrears, the returns on sugarcane are significantly higher than other crops like wheat, paddy, chickpea and potato, and the lure is so strong that farmers are even ready to settle for the delayed payment.

Even as the sugar industry gasps for breath, Chief Minster Akhilesh Yadav, a couple of days ago, gave a call for "Make in Uttar Pradesh". Virendra S Rawat contributed to this report

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Bhupesh Bhandari and Sahil Makkar
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