The ailing sugar sector and fall of Solapur’s bank
The 100-year-old Solapur DCCB sits at the top of the cooperative credit disbursal pyramid of the district.
A few weeks back, the Reserve Bank of India (RBI), took an extreme step of superseding the Board of Directors of the Solapur District Central Cooperative Bank (DCCB) and hand over the charge of the bank to the district deputy
registrar. The decision was taken because of the rising Non Performing Assets (NPA) of the bank that had threatened the financial health of the cooperative bank. With more than Rs 545 crores in non-recovered loans, Solapur DCCBs problems has much to do with the ailing sugar sector of the region
DCCB and it’s problems
The 100-year-old Solapur DCCB sits at the top of the cooperative credit disbursal pyramid of the district. Last year, the bank was given a target to disburse over Rs 1,000 crores as crop loans. Like other DCCBs, the Solapur bank deals directly with the village-level primary agricultural credit society (PACS) that disburse loans to the farmers. Being in the prosperous and industrial western Maharashtra, the Solapur DCCB, over the years, has been able to exceed its targets. Incidentally, this will be the first instance of a board of director of a western Maharashtra-based DCCB being dismissed.
Problem for the bank started a few years back and has to do with distribution of loans to various sugar mills and other non-agricultural initiatives. Documents show that the bank has extended loans to 30 cooperative and private sugar mills and the total quantum of such loans, along with interest, is expected to be Rs 546 crores. In particular, the bank has exceeded the exposure limit for lending to 10 sugar mills.
With recovery low, the NPA of the bank has been on the rise with it reaching the 40 per cent mark in the last fiscal.
The bank had faced several investigations by the cooperative commissioner and a writ petition was also filed in the Bombay High Court in 2013 asking for dismissal of the board of director.
The High Court had dismissed the board but the Supreme Court had put a stay on its order in 2015.
Solapur and its pain with sugar
Of the accounts that have become NPAs, 11 belong to cooperative and private sugar mills. Sugar mills, as the saying goes, can either make or break a financial institution. If mills run into losses, it becomes difficult for them to recover and more likely than not they end up harming the financial institutions they are affiliated to. Barring initial investments, mills require yearly infusion of working capital. Periodic enhancement of capacity also requires finances that mills get in the form of loans. The loans are paid off by selling sugar and its byproducts.
Geographically, Solapur lies in the rain shadow area of the state. The annual average rainfall for the district is around 750 mm. However, presence of eight dams in the district and the Ujjani, which acts as the end dam of the Bhima reservoir, has helped increase the irrigated area of the district. Of the total 11.6 lakh hectares of cropped land, 2.51 lakh hectares is irrigated of which around 35,000 hectares have sugarcane.
The water-intensive cane might not have been the correct crop for farmers in the region but thanks to political patronage, as well as surety of payment, farmers have helped it thrive. Solapur with 38 functional mills has the unique distinction of having the highest number of sugar mills in Maharashtra.
But unlike the mills of western Maharashtra, mills in Solapur suffer from the problem of lower recovery, which more often than not, threatens the economical viability of the mills. Sugar recovery is the ratio between sugar produce and cane crushed expressed as a percentage. Higher recovery percentage means more production of sugar per tonne of cane crushed and thus, more availability of sugar for mills to sell.
The average recovery of the Solapur district is barely around 10.58 per cent, which means for every tonne (1,000 kg) of cane crushed, mills in Solapur get only a little over 1 quintal of sugar. This is low as compared to mills in Kolhapur that report recovery of 12.20 per cent, or about 122 kg of sugar from every tonne of cane crushed.
Lower recovery, other than lower production figures, also means operational losses for mills as they have to spend more energy and man power but get lower sugar.
While the cane area of Solapur is limited, the larger concentration of mills force most of them to pay higher prices to farmers to attract cane. However, dependence on rains often take a toll on the crop, which reduces the acreage as well as the production.
Thus, for the crushing year 2016-17 only 22 of the 38 mills had taken season and most of them had a very short crushing period. On the other hand, mills in Kolhapur have had a longer crushing period as well as better sugar production.
What tips the balance for mills in Solapur is that when prices of sugar is high, ie. when cane is less, they do not have enough sugar to sell and when prices are low, they are forced to sell despite losses to pay the fair and remunerative price (FRP) to the farmers. Also being the rainshadow area of the state, abnormal large scale increase in cane area is also not possible.
Once a mill gets into losses, it becomes impossible to break the vicious cycle and more likely than not that it
becomes NPA.
Effect of dismissal and local politics
The board of directors, which was dismissed was stacked with heavyweights from the NCP, the Congress and the BJP. Vijaysinh Mohite Patil, the NCP MP from Madha, Dilip Sopal, NCP MLA and BJP
MLA Siddharam Patil were on the board.
Interestingly, 14 directors have taken loans from the Solapur DCCB and almost all of their accounts have turned NPA. The dismissed board was quick to cry political vendetta as the reason for the dismissal but its effect on the upcoming elections of 2019 can hardly be overlooked.
Solapur happens to be the home district of the state cooperation minister Subhas Deshmukh and one of the few regions where the NCP and the Congress still have a hold. With the bank gone from them, the NCP and the Congress leaders will surely find it difficult to answer charges of corruption levied against them by the BJP.
It now depends on what steps the administrator takes to recover the pending amount and how it shapes up the politics of the region.