Ethanol production: Sugar mills pitch for tripartite contracts with banks, OMCs

Sugar industry, which has been trying to augment ethanol production to meet the requirement for fuel blending in the country, has made a case for working out a tripartite mechanism between sugar mills, oil marketing companies and banks so as to give a boost to the ethanol business of such mills.

The Indian Sugar Mills Association (ISMA) has already written to the Department of Food and Public Distribution to make this possible as a large number of mills are struggling to get credit for setting up ethanol production facilities.

Lack of credit facilities

Recently, the Union government decided to create an additional capacity for producing 600 crore litres of ethanol, over and above the current production as part of its push to produce cleaner fuel. Currently, ethanol production capacity is around 350-360 crore litres and with the expansion it would go up by nearly three times. In a decision that raised the Opposition’s hackles, the government also decided to divert surplus foodgrains available with the Food Corporation of India for producing ethanol for fuel-blending.

“Even though the government approved 362 new projects to produce ethanol in the country, only 57 have been approved so far by banks for funding and disbursed only to 37 projects. This is mainly because a large number sugar mills have poor balance sheet n account of a number of reasons,” said an industry source on condition of anonymity.

“One of the primary reasons for having poor balance sheets is the prevailing sugar price. Most mills are incurring a loss of ₹4 for a kg of sugar produced currently. Banks are wary of financing them because of this,” the source said.

Three-way deals

However, sugar mills and distilleries want these ethanol projects to be treated as standalone and have a tripartite contract worked out between mills, OMCs and banks for each project. “If that is done, the bank can extend credit to the mill to produce ethanol and this will be bought by the OMC. The revenue accruing from this could be held in a separate account, from which payment can be done to the bank,” the source suggested.

Oversupply of sugar

Producing an additional 600 crore litres of ethanol would mean Indian sugar mills will be producing nearly 10 million tonnes less annually. Apart from helping to deal with the sugar glut in the country, it can give an impetus to India’s ethanol-blending programme, which intends to enhance the share of ethanol used in petrol to 20 per cent in near future.

With most beverage manufacturers and other bulk buyers of sugar remained closed for nearly two months due to nation-wide lockdown, the sugar offtake is expected to be lower than normal this year.

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