SC sets a bad precedent by junking SBI's valid security against loans to sugar mills

The Supreme Court has junked the SBI's collateral against loans to sugar mills on the ground that they collateral should be used to pay cane growers first. This will set a bad precedent on loan collateral

R Jagannathan October 14, 2014 16:06:26 IST
SC sets a bad precedent by junking SBI's valid security against loans to sugar mills

The Supreme Court has rushed in where angels fear to tread. In yet another case of messing around with the fundamentals of business, a court bench headed by Chief Justice HL Dattu junked the State Bank of India's legally valid collateral on the principle that the right to life supersedes the right to business.

Sure, no one can dispute this principle. If a human life is in danger, no one in his right mind will advocate that business should get precedence over it. But it does not follow that it businesses alone must pay for this prioritisation of the right to life.

The case is simple: the SBI lent money to sugar mills in Uttar Pradesh against the collateral of sugar stocks. But some (or all) of these sugar mills apparently had not paid growers their dues for cane due to low sugar prices. When a growers' association, the Rashtriya Kisan Mazdoor, moved the Allahabad High Court, the latter quashed the banks' right to their collateral and asked collectors to sell the stocks and pay growers first. Mills have started doing just this.

Seeing its Rs 3,000 crore loans to sugar mills turning rapidly go up in smoke (or into bad loans), the bank went to the Supreme Court, where it got only this pious statement. "In view of the suicides among farmers, let us put a quietus to this," The Times of India quoted the bench as observing, before dismissing SBI's appeal.

The Supreme Court has essentially thrown sand into the wheels of commerce by taking this stand.

It is no one's case that farmers must be allowed to die of debt or unpaid dues. But can the courts rob Pritam to pay Pappu? Banks like SBI are owned by taxpayers, and making them suffer for what was a perfectly valid loan-against-collateral deal will do huge damage to the whole business of lending to agro-industry.

Consider what all is going wrong in this case.

First, states will fix higher and higher prices for cane based on how politicians calculate their political interests. This means cane prices are not market-determined, and are politically tweaked, when sugar prices are based on demand and supply. Last year sugar prices hit a five-year low and they still haven't quite recovered. It is an economic recipe for disaster. You can't leave one end of the chain to be administratively fixed and the other end to be market-determined.

Second, problems arise when market prices of sugar crash and mills are unable to pay growers. Suddenly, business is expected to subsidise growers even if it is losing money.

Third, for reasons of bringing down food prices, the government will not allow sugar to be exported. So sugar prices remain down in the cellar even if more can be sold abroad.

Fourth, banks lend money to mills against collateral. But if this collateral is no longer enforceable, why would they lend again to sugar mills? If collateral can be enforced only in fair weather, what message is the Supreme Court sending to banks?

Fifth, the real issue is farmers' dues: but is it the job of mills or banks (or both) to bail them out when they themselves need a bailout? Is it not government's job to give meaning to the Supreme Court's lofty principle of giving the right to life priority over the right to business?

The Supreme Court order in the UP sugar mills case seems ill-thought-out. It forces one victim (banks and mills) to pay other victims (the farmers) when the villains are politicians who artificially fix cane prices and the markets, which can turn adverse to mills any time.

The courts cannot take a cavalier attitude to bank collateral. The remedy for poor farmers' troubles lie elsewhere - with governments.

Updated Date:

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