Friday, October 17, 2014

SUpreme Court Rejects Claim Of Bank

Sugar-coated political risk hits public banks-LiveMint--By Ravi Ananthanarayanan

After the SC rejecting appeal against an HC order directing sugar mills to sell stocks to repay cane farmers, banks will suffer as they may fall short on collateral
 
In India, political risk is not only impeding business but also spilling over to the financial institutions. On Monday, the Supreme Court rejected an appeal against an Allahabad high court order directing sugar mills to sell stocks to repay cane farmers.
 
Banks had argued they had first charge over sugar stocks and they should be used to repay the loans taken by the mills. The apex court observed, according to a news report on the Times of India website, that the cane growers’ right to life is more important than the banks’ right to carry on business. That is no doubt a humane way of looking at things, but also presents a rather chilling prospect for banks and their ability to ring-fence their collateral.
 
A fundamental question that arises is whether a financial institution’s interests will now be secondary to public interest, even if the business in question is reliant on loans. Claims of shareholders, for instance, are secondary to creditors. But now, one more element of public interest may have been added to this equation.
 
Of course, this observation is specific to this case. And, this case itself has some peculiarities. It results from a public interest litigation (PIL) filed to ensure that mills pay farmers’ sugarcane arrears. They were asked to pay the dues to farmers by 31 October by selling stock. The high court said that the mills were not disputing the liability but banks were opposing the move.
 
Now, sugar mills operate on a long working capital cycle, being a seasonal business, and raising bank funds is common practice. Under Uttar Pradesh state law, mills are allowed to borrow money against their sugar stocks but on condition that a percentage of these loans are used to settle dues to sugarcane farmers. The judgement mentions that up to 85% of the stocks should be earmarked for payment of the farmers’ dues by the mills. however, farmer dues remained uncleared, prompting a PIL. The high court asked mills to sell the stock to repay farmers, but banks objected. Their contention was that their loans entitle them to a first claim over the stock.
 
But the high court clarified that if the arrears due to farmers are already tagged on to the sugar inventory, then banks cannot have a prior claim. But note that the court did not go into allegations of whether funds were diverted by the mills. Normally, they should have used these loans to repay farmers, freeing the stocks of any claims. The high court order even clarifies that once the arrears are cleared, the bank’s right over the stock is restored. Banks now need to enquire why mills did not use their loans to clear arrears, and whether any action can be taken against them. If mills had cleared dues, then the stocks would have been available as valid collateral.
 
What are the implications of this case? In the near term, banks are sufferers as they may fall short on collateral. Sugar mills are relatively unaffected, except that large sales of sugar will keep prices down. In the medium term, banks may become wary of lending to Uttar Pradesh sugar mills. Or, they may put in a foolproof mechanism to ensure that no arrears remain on inventory that is held as collateral.
 
But the mess in the Uttar Pradesh sugar industry continues. The state government succeeded in not only imposing a high state advised price but also cleared arrears of the current season. Earlier, mills typically carried over dues into the next season. That is going to see both the state government and farmers unlikely to back down in the current sugar season as well. Expect fireworks in the coming months.
 
Banks should have ensured that their loans were collateralized properly. However, they also need to become prudent about lending to sectors where government interference is high, and where public and private interests often clash. More importantly for state-owned banks, the ones affected in this case, succumbing to political pressure in lending can be hazardous for their health.
 
 

Right to life overrides right to do business, Supreme Court rules


NEW DELHI: Right to life outweighed right to do business with the Supreme Court on Monday rejecting State Bank of India's petition challenging an Allahabad high court order directing sugar mills in Uttar Pradesh to sell the sugar stock hypothecated to SBI against loans to pay sugarcane farmers' dues.

Sugar mills had taken loans totaling Rs 3,000 crore from SBI by hypothecating their sugar stock. Under law, the creditor bank has the first right on the hypothecated sugar to realize its dues if the mills default on repayment of loans.

Acting on a PIL filed by Rashtriya Kisan Mazdoor, the HC had invoked Section 17(5) of UP Sugarcane (Regulation of Supply and Purchase) Act, 1953 and extinguished the right of secured creditors and directed collectors to grant permission to sugar mills to sell the sugar stock for payment of dues to cane growers.

Appealing against the HC order through advocate Sanjay Kapur, SBI told the SC on Monday that the mills were now disposing of sugar stock, which was a security against loans. SBI apprehended that the Rs 3,000 crore loans it had advanced to mills would turn non-performing assets.

SBI also said the HC order for disposal of sugar stock could potentially turn sugar mills sick as it would proceed under the coercive Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act to sell the mills' assets to recover its dues.




It also said no bank would come forward to grant any advance/loan to these sugar mills in case it was held that first charge on sugar stock would be in favour of cane growers and not banks, as held by the HC.

A bench headed by Chief Justice H L Dattu felt the cane growers' right to life was more important than the bank's right to carry on business, especially in the face of hardships faced by farmers leading to many suicides.

"In view of the suicides among farmers, let us put a quietus to this," the bench observed before dismissing SBI's appeal.

Similar considerations had weighed with the court in dismissing the appeals filed by four public sector insurance companies on settlement of claims filed by ​Jammu & Kashmir flood victims. The court had refused the insurance companies' plea to conduct preliminary survey before settling claims.


The SC asked them to implement the HC order, which had directed them to pay up 95% of the claim amount if the insurance cover was below Rs 25 lakh and 50% for those with insurance cover exceeding Rs 50 lakh.

In the recent past, SBI has been at the receiving end also due to scams. Close on the heels of NPAs after cancellation of 2G spectrum licences by the apex court, it suffered a jolt when the SC cancelled all coal block allocations to private companies, which had taken huge loans from SBI.

The Coal Producers Association had informed the court that loans worth Rs 2.5 lakh crore advanced by banks and financial institutions would become non-performing assets because of en masse cancellation of coal blocks. It had said that SBI might suffer the biggest jolt as it could suffer a hit of up to Rs 78,263 crore, which was almost 7.9% of its net worth for 2012-13.

Banks give over Rs 4,000 crore interest-free loans to sugar mills-ET 27th June 2014

Banks have so far disbursed over Rs 4,000 crore interest-free loans of the total Rs 6,600 crore approved by the government to cash-starved sugar mills for clearing dues to cane farmers.

In December, the Cabinet Committee on Economic Affairs ( CCEA) had approved Rs 6,600 crore interest-free loans to the sugar industry exclusively for clearing sugarcane arrears. It decided to give loans via banks equivalent to the excise duty paid by the mills in the past three years.

"As on June 3, banks have disbursed Rs 4,072 crore interest-free loans to sugar mills," a senior Food Ministry official told PTI.

Of which, Rs 1,412 crore and 1,461 crore have been disbursed to mills located in Maharashtra and Uttar Pradesh, the country's top-two sugar producing states, he said.
Banks have been given June-end as deadline for sanctioning the entire loan amount. The total interest burden, estimated at Rs 2,750 crore over the next five years, is being borne by the government.

Mills have to repay the loans in five years and can avail of a moratorium on repayment for the first two years.

The Rs 80,000-crore sugar industry has been facing a cash crunch due to higher cost of production and lower selling prices in the wake of surplus output over the past few years.
Currently, sugarcane arrears stand at about Rs 11,000 crore across the country, with the maximum of Rs 7,200 crore in Uttar Pradesh.

Amid concerns over rising cane arrears, the Food Ministry is also examining providing additional interest-free loans of Rs 4,400 crore to sugar mills to clear dues to cane farmers.

It is also looking at hiking sugar import duty from 15 per cent to 40 per cent to curb cheap imports and increase ethanol blending in petrol to 10 per cent as an effort to improve the liquidity of mills.

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