CCEA approves Rs 6000 crore interest-free loan package to sugar companies

India is the second largest producer of sugarcane in the world. India contributes almost 14 per cent of the global sugar production followed by Brazil, which contributes almost 22 per cent. The industry benefits nearly 2.5 crore people who grow sugarcane in India. The major sugar producing states in India are Maharashtra, Gujarat, Uttar Pradesh, Haryana, Tamil Nadu, Punjab, Karnataka, Bihar and Andhra Pradesh.

Sugar industry observers said every mill has defaulted on payment of the mandatory fair and remunerative price (FRP) to sugarcane farmers as nobody wanted to miss out on the government package of interest free loans announced earlier. Sugarcane arrears stand at Rs 21000 crore in the country as a whole, which is built up on account of the difference between the Fair and Remunerative price of sugarcane fixed by the Centre and the higher State Advised Price fixed by some of the state governments. 

In a press conference on Wednesday, road and transport minister Nitin Gadkari said that, banks will provide Rs 6000 crore as interest free loan for one year, with the government bearing the burden of interest on the loan.  The approved loans will be provided to those units, which clear at least 50 per cent of their outstanding arrears before June 30, 2015. To ensure that farmers are paid their dues as early as possible, the Government has mandated that, banks will obtain the list of farmers and the dues payable to them from the sugar mills. So, that the arrears are directly transferred to the bank account of the farmers on behalf of the mills. And the balance, if any, will be credited into the mills account. This is the third such package given to the industry since December 2013. The government had given an interest-free loan of Rs 6600 crore to the industry in December 2013, another similar package of Rs 4400 crore in June 2014.

On the other hand by agreeing to pay interest on the Rs 6000 crore, the government has just made the scenario worse for the sector. Banks will now carry more debt in their books. Sugar mill owners will add this Rs 6000 crore in their books as debt which has to be paid back. If these mills are selling sugar at a loss, there is no way they can repay the entire amount.

As an effect of the approved loan package from the government on Wednesday, Sugar stocks rallied almost 3 percent to 15 percent.