The Hindu Business Line : RBI upholds tea industry's case for relief

WITH the Reserve Bank of India having accepted all but one recommendation of a working group constituted by it to assess the tea industry's case for relief in the given crisis situation, tea companies can look forward to reliefs by way of lower interest rates, conversion of seasonal deficits into term-loans, extension of time to liquidate working capital dues of the last season, rescheduling of repayment of existing term-loans etc.

The recommendation for relaxation in delinquency norms has, however, not been entertained by the RBI. While tea companies are generally happy that the RBI, with its prescriptive guidelines for banks, has tried to help them, there is apprehension that foreign banks may not bring down interest rates, which are much higher than the rates charged by Indian banks.

Foreign banks are currently charging interest up to 16.5 per cent as against 12.5-14.5 per cent charged by Indian banks.

Recommendations

The seasonal deficit of tea borrowal accounts (classified as standard assets) may be converted into a term-loan repayable within five years subject to the condition that at least 60 per cent of the peak hypothecation outstanding has been liquidated by borrowers.

Extension of period to liquidate the working capital dues of last season may be allowed up to a maximum of six months in those cases where the entire outstanding is backed by stock of tea or the prompt (receivables) without affecting the drawings and working capital limit of current season, provided at least 60 per cent of the peak hypothecation outstanding has been liquidated.

Release of need-based working capital finance for the current season based on realistic projection keeping in view the production track record, accepted price level, market demand etc may be allowed in accounts classified as standard assets.

Reschedulement of existing term-loan repayment schedule on the basis of borrowers' future projection and repayment capability may be allowed.

After the conversion/restructuring/rescheduling, the term-loan as well as working capital limit shall be treated as current dues and need not be classified as NPA, provided that at the time of conversion/restructuring/ reschedulement, the account was classified under standard asset. The asset classified thereafter would be governed by the revised terms.

In respect of tea advance for which interest and/or instalment of principal remains unpaid for two harvest seasons but for a period not exceeding two years, such an advance should be treated as NPA.

While making this recommendation, the working group noted that as per RBI's guidelines, tea advance is categorised as agricultural advance for which the stipulation is that if interest and/or instalment of principal remains unpaid for two harvest seasons/for a period not exceeding two half years, such an advance should be treated as NPA.

But the crop cycle for tea plantation is one year and, therefore, the stipulated ceiling period of two half years is standing in the way of tea accounts getting the full benefit of RBI's guidelines.

As for tea plantations, two crop cycles are equivalent to two years and as the industry is passing through a crisis, the delinquency norms should be relaxed.

But, the RBI has not agreed to extend the delinquency period beyond two half years on the ground that tea plucking is a continuous process. Tea leaves are plucked from existing bushes and, therefore, the two half years stipulation can apply to the industry.

Fresh working capital term loan in accounts classified as standard assets may be allowed where due to capital expenditure incurred by the borrower during the last three years for development/extension of tea estates, processing unit etc without arranging corresponding long-term fund, as a result of which there is asset-liability mismatch which, in turn, has affected the net working capital position of the borrowers.

Giving the context for this recommendation, the working group has pointed out that a number of tea companies did not bother to tie up long-term finance when the industry was doing well.

They did not face much problem as they could finance such projects either out of their cash generation or by utilising a portion of their working capital advance. Assets created out of such capital expenditure are charged to the lending banks of borrowers.

However, due to current problems, such borrowers are finding it difficult to meet their working capital requirement since a portion of it is tied up with the capital cost of the project.

As per the working group's recommendation, which has been accepted by the RBI, this facility is to be granted only to borrowers who have a satisfactory track record, have a minimum debt equity ratio of 3:1 and have not diverted/transferred funds for investment in other companies/to group subsidiaries.

Banks may allow a rate of interest up to two stages better than the rate applicable to borrowers according to the credit rating by individual banks; but after reduction the rate should not be below PLR. The industry's case, upheld by the working group, was that a lower interest rate at this juncture would enable tea companies to be more competitive.

Under the refinancing schemes for the tea industry, Nabard may charge an interest rate 0.5 per cent below the rate as applicable to a similar project in other industry.

(To be continued)

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