Source: The Hindu Businessline

Faced with loan default, many players have closed shop

Rutam Vora/Vishwanath Kulkarni
January 09, 2019
Cotton ginners across the country are going through tough times. Faced with poor viability following reduced demand for yarn, and price disparity, ginners are handing over the keys of their factories to the bankers, quite literally.

In Gujarat, which has the largest number of ginning units in the country, with 1,300 of 4,300 mills, ginners are among the few MSMEs with a high incidence of non-performing assets (NPAs), bankers said. Industry experts say the problem lies in the market dynamics and misplaced policy priorities. A decade ago, when the ginning business was considered a promising and prestigious investment avenue, huge investments took place to add new capacities with subsidised bank borrowing.

“The main reason behind stress is the lack of price parity. Raw cotton — the raw material for ginners — is getting costlier, while yarn prices are not picking up due to lack of demand,” said Bhupendrasingh Rajpal, President of the Maharashtra Cotton Association.

“Despite lower yarn prices, cotton prices are not going down because the MSP is hiked to protect farmers’ interests. Now the ginning business is suffering.” “Ginning capacities in the country are double the crop size. Due to this, the industry faces idle capacities, hence the losses,” he added.

Ginned cotton fetches around ₹43,000 a candy (each of 356 kg), whereas the cost is around ₹44,000. Most units are operating at reduced capacities to meet the running expenses and pay for interest. Once this cycle goes beyond its bearing capacity, the ginner defaults on repayment.

New ginning clusters had come up in Saurashtra, North Gujarat and Central Gujarat. “Out of 1,300 mills, about one-fourth are operational, that too with reduced capacity utilisation. More units may shut down due to price disparity and losses,” said Dilip Patel, a leading ginner at Kadi in North Gujarat.

The scene is no different in Karnataka and Telangana. The majority of the 350 units in Telangana are operating in a single shift and the lack of demand from textiles mills and MNCs has hit the payment cycles, triggering a liquidity crunch, said B Ravinder Reddy of the Telangana Cotton Association. Ginners in the State plan to approach the government seeking sops such as the waiver of minimum fixed electricity charges, which works out to ₹1.75 lakh a mill a month, and has to be paid whether or not the mill is operational.

In Karnataka, about half the 300 mills have already shut down owing to lack of business. In Raichur, about a third of the 39 units have not started operations this year, said Ramanuj Das Boob, who exited ginning to become a sourcing agent for MNCs. “The situation is going to be very bad this year on lack of demand,” he added.

Manubhai Agarwal, a ginner from Bodeli, said: “The ginning business is no longer remunerative. Profits are squeezed. I had two units of total capacity of 700 bales (each of 170 kg) a day. Now I am operating only one to process 200 bales.”

The losses didn’t come in a single season, most players believe. The accumulation of losses due to disparity in prices, coupled with inconsistencies in cotton export policy, made the ginning business unpredictable. This made the ginners vulnerable to losses and loan default.

(Source: The Hindu Businessline)