RBI rejects debt SOS from textile companies

The textile industry is deeply in debt. And the country’s central bank, the Reserve Bank of India, has refused — on flimsy grounds — to restructure its bank loans.

The industry accounts for 4.6% of the country’s GDP. With more than 30 million people working at various levels with numerous textile firms, it is also the second largest employment generator. It accounts for 10.5% of the country’s exports and 14% of the industrial production.

But the RBI has ignored these facts, putting the future of the millions of people dependent on the industry, the firms and the banks that have lent crores, at risk.

Fluctuating cotton prices coupled with a poor demand for textile goods have made it difficult for small and medium textile units to repay loans as well as finance working capitals (the cash needed by an organisation for its day-to-day operations).

Against this background, the RBI asked the textile ministry to study the prevailing conditions and prepare a debt restructuring plan for the industry. The ministry chose the Bank of Baroda Capital (BoB Capital) to carry out the study.

In its May 2012 report, BoB said almost all segments of the industry were cash-strapped and it was ‘imperative’ to infuse additional loans. The report, a copy of which is with DNA, pegged the restructuring of loans at Rs35,000 crore.

In a letter (dated June 29, 2012) to the ministry of finance, the RBI, however, made it clear that it did not feel the industry’s problems were ‘severe or catastrophic’. The reason: A Rs35,000-crore restructuring plan amounted to only 22.5% of the cash credit provided to the textile sector.

While citing the reason, the central bank ignored a vital observation made in the BoB report. “Large borrowers are relatively safe...the problem is only in the small and medium segments, which account for 90% with a loan amount of Rs34,748 crore.”

Industry experts believe the RBI rejected the plan because it involved mostly small borrowers who do not have the resources to petition their cause like corporate giants. “Had it been a Kingfisher, the RBI would have considered it,” said S Dhananjayan, a chartered accountant from Tirupur in Tamil Nadu. The town is known as the textile hub of the south.

Since the textile industry problems started only in 2011, the RBI letter pointed out that a performing account, which has borrowed money, will face difficulty only after some time. So, there is no need for debt restructuring at the moment.

The BoB report, however, says the industry is in such poor shape that it cannot generate money to even pay EMIs and interests. For this fiscal, the outstanding debt is Rs100,617 crore and the EMI and interest for this year works up to Rs4,630 crore. A firm needs to pay almost Rs1.80 towards capital repayment (interest + debt instalment) to generate Re1 from the business, according to the report.

The situation is worse for the cotton and cotton yarn segment. A firm needs to invest a minimum of Rs10 to generate Re1.

The BoB report says the number of cases referred to corporate debt restructuring (CDR) cells of banks is on the rise. Between April and December 2011, there were 59 cases amounting to Rs50,000 crore. The number was 31 in 2010-11 fiscal.

DK Nair, secretary general of the Confederation of Indian Textile Industry (an umbrella organisation representing the entire textile chain), said the RBI should have set aside rules to consider debt restructuring. “If it does not happen, the industry will be in the red.”

Other segments such as cotton and blended yarn too have had losses in the current fiscal because of a steep fall in yarn prices.

The report also pointed out that firms dealing in man-made fibre such as polyester and nylon will see a sharp drop in profits by about 31% because of non-operating expenses (interest).

It said the current debt crisis was mainly because of external developments. Management or labour unrests affecting operations have nothing to do with it, according to the report. 

“The central bank should have taken a sympathetic view as millions of people are dependent on this industry,” said BK Patodia, chairman of GTN Textiles, Cochin.