The Hindu Business Line : SICA seeks inputs for cotton funding model

THE South India Cotton Association (SICA) has sought to give greater depth to its project on evolving the bank assisted cotton payment model it mooted recently.

The association has initiated a study with the help of the Crisil on working out a cotton funding model to help out the sellers and buyers. It has asked its members to present a wider perspective on the cotton payment methods prevailing in the industry to give the association further scope to build a reliable and working model of bank-financed cotton payment model. The suggestions in this regard were made to the SICA members at the 25th annual general meeting of the association held here on Sunday.

Outlining the necessity for early framing of a bank-funded cotton payment model, the SICA Secretary, Mr K.N. Viswanathan, said that the country's annual cotton transaction volume rising to the level of Rs 22,000 crore, the cotton trade hit percentage (for non-payment of the cotton sold), as assessed by the preliminary study, was around 20 per cent. And, this scenario called for urgently strengthening the move to find a strong cotton financing system involving the banks and FIs.

Some of the analyses in the Crisil and SICA study (to suggest the new payment model) showed that most textile mills functioned with lack of sufficient working funds for cotton purchases, which are seasonal in nature. Given the prevailing environment, mills that hold cotton longer are able to show better balance sheet and those in piecemeal cotton purchases end-up paying higher prices for raw material. Cotton price difference will be 10 per cent between those units buying on payment and those getting it on credit while the interest difference is 6 per cent for cash purchase and credit purchases.

In the absence of any specific cotton financing other than the existing working capital scheme available, the advances for the mills' cotton purchases will attract an interest rate ranging between 7 per cent and 12 per cent, against the prevailing international rate of 4 per cent (LIBOR) or even less.

The average profits of the textile mills these days work out at 5 per cent on the turnover (as per balance sheet study) and at the other end, the possible interest cost savings in raw material can be in the range of 4-6 per cent, he added.

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