Expected fall in profit margin may throw bank lending to tea sector off track

KOLKATA: Tea growers in Dooars of North Bengal may see a squeeze in profitable margin this year with about 28% rise in wage cost and falling prices, calling their ability to attract finances in the future into question.

Banks' lending growth to the tea sector has stagnated with outstanding loans remaining at Rs 3,000 crore at the end of August, unchanged compared to the year-ago period.

Smaller tea estates are more prone to lose bank funding as they often undermine the need to improve yield and face stress more than anybody else. The higher wage cost and other input cost coupled with falling prices may throw their operation out of gear. Wage cost accounts for about 60% of the total cost of tea growing.

With Reserve Bank of India emphasizing on proper screening of accounts to reduce stress on asset quality and withdrawal of regulatory forbearance on sticky assets, banks have been more cautious in lending nowadays.

The deteriorating asset quality have forced lenders to be on guards. United Bank of India, which has traditionally been one of biggest lenders to tea growers, has already turned selective with its limited resources. UBI’s outstanding exposure to the sector is close to Rs 950 crore, sources said.

Fresh lending to tea growers typically starts in January and reaches its peak in March-April every year.

The imbroglio related to alleged non-payment of wages to tea workers by Duncan Industries leading to starvation death has thrown up a larger issue: How are the tea growers in Dooars doing?

"They are facing a stagnation in production," said a senior official with a global consultancy firm tracking the sector. "This, couple with falling prices may lead to 15-20% squeeze in profit margin this fiscal. This will impact their ability to re-invest in tea gardens and therefore, their working capital requirements from banks are likely to go up."

According to statistics available with Reserve Bank of India, banks' outstanding loans in the tea sector amounted to Rs 3,000 crore as on August, unchanged year-on-year but showed a 3% fall when compared to August 2013 data.

"The increase in wage cost coupled with downward realization of prices with stagnating production could lead to pressure on profitability," said Arindam Saha, assistant general manager with CARE Ratings.

Between April to August this year, tea production was estimated to be about 624 million kg compared with 626 million kg during the same period last year. The Siliguri auction price has seen a drop of Rs 5-8 per kg while there has been 28% wage hike to Rs 122 per day, calling many tea growers' viability into question.