A delay in signing purchase agreements by oil marketing companies (OMCs) with prospective ethanol producers is holding up the setting up of new standalone ethanol plants needed to produce additional ethanol required for fuel blending programme, according to a recent letter written by sugar companies to the government.

A recent letter to the Ministry of Petroleum and Natural Gas Secretary from Indian Sugar Mills Association (ISMA), the trade body that represents the sugar mills, a copy of which was seen by BusinessLine, urged the minister to nudge the OMCs to sign such purchase agreements (PA) with project proponents as some of the loans sanctioned by the banks are on the verge of expiring.

An industry official said OMCs were reluctant since any agreement signed with the producers would hold them responsible for depositing payments towards loans taken for setting up ethanol units in an escrow account. “No one wants additional responsibility thrust on them. This happened with the power agreements too a decade ago,” the official said on condition of anonymity. OMCs, when contacted, did not respond until this report went to print.

While sugar mills and ethanol manufacturers have contracted to supply 346 crore litres of ethanol in the current oil marketing year (December 2020 to November 2021) till August 16, the target for the next season is 450 crore litres, adequate for 10 per cent blending.

Banks’ norms

In January this year, the State Bank of India (SBI), on being asked by the government, came out with guidelines and standard operating procedures (SOPs) for offering term loans to the standalone ethanol distilleries for producing ethanol for fuel blending. Many other banks, too, adopted the same guidelines and SOPs. As per these norms, banks said they are willing to give loans with several concessions such as five per cent collateral security as well as at a better debt-equity ratio (promoters’ contribution as low as five per cent) if there is a tripartite agreement between the bank (lender), the project developer (borrowers) and OMC (buyer). The only condition that the banks put forward was that the project developer should procure a PA from the OMCs. According to an industry source, the PA should vouch that the OMC would be buying at least that much quantity of ethanol that is required to cover the repayment instalment and the agreement should cover the entire period of the loan.

Win-Win for all

As worked out, the OMC will deposit the payment toward ethanol purchase in an escrow account from which the bank will recover the instalment before the releasing the balance to the firm. “This is a win-win situation for all. The government, which is keen to have more ethanol blending in fuel, would have better supply of the alternative fuel while many sugar mills whose account books are not good for a variety of reasons would have got cheaper loans for setting up ethanol plants. Banks, too, would benefit because their repayment is assured,” the source said.

The grouse of the mills, as expressed by ISMA in its letter, was that even though the Ministry has approved issuing of expression of interest (EoI) by the OMCs for these PAs, the oil firms were still not coming forward to do it.

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