Maharashtra unfazed, plans new guarantees

The Maharashtra government is going ahead with fresh plans to back Rs 1,500 crore (Rs 15 billion) in medium-term loans with state government guarantees, unruffled by attachment orders issued by the Mumbai Debts Recovery Tribunal - II and despite the reservations of the bureaucracy.

The tribunal's order pertains to attaching two offices located in Mantralaya, the state government headquarters.

The National Bank for Agriculture and Rural Development had insisted upon the government guarantee and the proposal would come up before the state Cabinet meeting next week, a senior official said.

The plan is to restructure the debt of 78 cooperative sugar factories. The proposal was the brainchild of Nationalist Congress Party chief Sharad Pawar in the wake of a sharp slump in sugar prices that resulted in a short margin situation for the Maharashtra State Cooperative Bank and other institutions that had huge stockpiles of sugar hypothecated to them by cooperative sugar factories in the state.

The official maintained that around 78 sugar factories had stocks hypothecated to these banks at the prevailing market price of sugar, based on which the institutions disbursed funds.

Subsequently, the prices of sugar fell sharply, resulting in the banks facing a short margin situation.

This implies they will not be able to realise the price for the stocks on the basis of which they disbursed their funds.

Under the proposal, the loans issued to the factories would be treated as medium-term, five-year loans so that banks do not lose out on account of the short-margin situation and sugar factories are allowed a longer period to pay their dues.

Officials feel that the government is indirectly compensating the banks for a wrong business decision made by them.

"Had the prices of sugar escalated, these banks would not have passed on the benefit to the sugar factories. Why should the government back these medium-term loans passed on to cooperative sugar factories that are consistent defaulters," one state government official asked.