Chairman
Federal Bank Limited
Head Office
Aluva 683 101
Dear Sir,
Sub: Our Packing Credit Limit with your Erode Branch brought to the Chairman's attention for various reasons.
This note is addressed to the Chairman of the Bank on spefic banking problems that require the Chairman's direct attention with a request for interventional directives from the Chair.
Whitefield Cottons is a private limited company established in the year 1995, originally with the object of setting up an export oriented shuttleless weaving unit. The company is a closely held private limited company with two Directors, one of whom (Sivasubramanian Muthusamy) is a Business Management Graduate (MBA) and another (Dr Umamaheswari Sivasubramanian) is a practicing Family Medical Physician.
Even before the weaving project is given shape, the company began exporting cotton terry towels and made ups, well ahead of its manufacturing project which is still not commissioned as envisaged for various reasons.
This is a company with very promising and certain growth prospects limited only by want of fair credit facilities from Federal Bank where the company has been banking since 1995 with a Packing Credit Limit at Erode that remains frozen at Rs 80 lakhs since year 2000.
It is important for us to introduce our company and its prospects in its right perspective so as to enable the Chairman to gain a complete perspective of the company's certain prospects that are being limited. As an introduction we request the chairman to view our website at http://www.whitefieldcotton.net, effectively set up, and professionally indexed by the major search engines. The website is hosted by one of world's top most ecom business web services based in the United States. The company is now e-commerce capable and is standing by for the required facilities from the bank to become one of the first Indian textile companies to sell direct world wide its products with its own brand name.
The product line began as a mass produced industrial towel and expanded into terry utility towels to include luxury bath towels, bath robes and high end fabrics and made ups at present.
Apart from its impressive electronic commerce prospects, the volume of direct business that the company could generate would sound too ambitious to state in this communication, but at least it can be said that the company can generate more than enough export orders from the right buyers. The Director of the company's business travels during the last five years included destinations in USA, Canada, South America, almost all of Europe and some African countries. The Director travelled either as a member of an official Trade Delegation from the Export Promotion Council (once to Africa and once to South America) or as independant business visits to meet with Buyers in USA, Canada or Europe. As a result the company regularly receives enquiries from companies as varied as US textile giants with business volumes of over a billion dollars to smaller importers in USA and elsewhere whose imports are under a million dollars.
It is rare for a company to have strengths both on the marketing and on the technical front. The company is technically gifted, in the sense that the Director has systematically learned the technical aspects of its products as also the technical aspects of plant design and the manufacturing processes complete with a vivid evaluator's understanding of the required machines, the machinery capabilities, the machinery functions and their individual investment effectiveness- not only in Weaving but also in Yarn Spinning, Fabric processing and Finished Product manufacturing.
The company has a Packing Credit Limit of Rs 80 Lakhs, well short of its requirement, secured by collaterals actually valuable well in excess of the limits sanctioned, personal guarantees by the Directors and an additional guarantee by one of the family members, whose property is pledged as collaterals. The company has had an impeccable performance and operational record at the Branch, except for a problem at present which requires the Chairman's attention.
We had no infrasturcture at all till early 1999, and we had the products woven, whitened, stitched and baled by subcontractors in various locations. In this style of operation, there were problems related to quality, delivery time, cost over-run, logistics and administrative control, which included the issue of pilferage. More importantly, our buyer started insisting on inhouse manufacturing facilities as most experienced buyers do prefer.
So in 1999, as first phase, we invested all our DEPB and Drawback gains in land and buildings and plant and machinery, which has now given us a PART of the infrastructure required, to be improved upon:
- Land 1.64 acres of prime, developed industrial land in a prominent location: We bought 1.64 acres of land in Sipcot Industrial Area, which comprises 2000 acres of modern and complete industrial infrastructure particularly suitable for Textiles, located 25 kilometers from Erode city center on a major national highway. Rs 8 lakhs paid up and approximately Rs 2 lakhs remains to be paid.
- Used Japanese Terry Weaving Machines: We bought 28 imported second hand Japanese terry weaving machines. All these machines are in good working condition and comissioned 22 machines immediately in rented premises. The rest 6 machines are kept as reserve to meet additional capacity requirements. The value of investment is Rs 15 lakhs approximately.
- Supporting Machinery: We also bought a secondhand baling machine, a 40 KVA geneator and weft yarn twisting machines required for the weaving unit. These equipments cost us Rs 4 lakhs.
Tailoring Machinery: We acquired 6 powered straight line sewing machines and 18 powered overlock machines. The investment is about Rs 1.5 lakhs. - Factory Building: A factory building admeasuring 5000 sq.ft. was constructed in a land situated in a prominent place, leased from the Director's family. The cost of the building is about Rs 22 lakhs.
- Office Building: Office infrastructure was greatly improved with a newly constructed building of land area 1264 square feet situated in a prime area in central erode. The cost of the building is about Rs 12 lakhs.
All these infrastructure facilities of value about Rs 62.5 lakhs were built up with out availing any term loan as during the period from 1996-97 to 2001 we received DPEB benefits to the tune of Rs.45.44 lakhs and by utilising a portion of the profits generated.
At this point of time we had a sanctioned term loan limit from Sipcot for Rs 1.5 crores for which the upfront fee of Rs 1.5 lakhs was paid, collaterals pledged, charges created and registered with the Registrar of Companies but the loan was not disbursed, one of the major reasons being the absence of a positve reference from Federal Bank which would neither approve of the term loan from another instituion nor would offer the required facilities itself. However the infrastructure created was in line with our original objective of creating a manufacturing facility and it also qualified as margin money brought in from our end towards the project cost, making us even more eligible to avail the term loan.
From Sipcot we could not avail the sanctioned term loan till it transferred all its project finance to its sister instituion TIIC. Eventually we had approcached IDBI, and later the TIIC, and by now our production requirement as also our increased expertise included textile processing in addition to weaving. We were encouraged by Government's Technology Upgradation Scheme (TUF) for which we were qualified in all respects for a Term Loan of Rs 5 crores at about 10% per annum with a re-payment period of 7 - 10 years and though there was overwhelming initial response at the instituion's highest levels at project presentation both the institutions eventually slowed down due to unknown reasons.
The export credit facilities with Federal Bank, Erode branch was a PCL of Rs 15 lakhs and an FUBP limit of Rs 20 lakhs in 1996 which now remains as a PCL of Rs 80 lakhs (fully utilised) and an FUBP limit of Rs 105 lakhs (all negotiated bills are collected and there are no FUBP outstandings).
With virtually no production infrastructure due to delay in availing term loan facilities, exports progressed and we performed very well during the first 5 years.The figures are as below:
Year Export Sales Profit
1996-97 37.38 2.55
1997-98 150.42 9.75
1998-99 200.27 19.03
1999-00 141.14 26.41
2000-01 113.50 3.12
The business came down since year 2000 due to the following reasons:
We have been shipping our products since 1996 to a company in Canada, Montreal. We considered it important not to take up excessive commitments before we establish full-fledged, integrated manufacturing facilities. This overseas client had been buying our products in suitably large volumes, and most of our transactions valued at over Rs.1.5 million during the last 4 years were from this company.
The company has been a comfortable buyer to work with and it has been very safe to transact business with this company, but the ordering pattern right from the biginning was prone to seasonalities - about 6 months of voluminous offtake and 6 months of comparatively inactivity.
The ordering pattern was taken up during a visit by the director of with the overseas client to visit our company in India in October1999, as a result the ordering pattern was streamlined and made more voluminous and well scheduled.
FoThe overseas client placed a bulk order amounting to Rs. 3.43 crores in November 1999, all to be Letters of Credit transactions. The schedule of shipments was to start in December 1999 to complete the about 65% of the total volume by February 2000. The export credit enjoyed by us at that time from the bank was PCL Rs.60 lakhs and FUBP Rs. 90 lakhs. These limits were quite insufficient to execute this order, of which exports of about 2.4 crores were to be effected with in the next 90 days as peak requirements. Therefore, we approached the bank with a proposal enhancement of PCL limit to Rs. 1.20 crores. However, the bank did not consider the term loan proposal and sanctioned only enhancement of PCL limit to Rs.80 lakhs.
In the absence of timely response from the Erode Branch, we still took efforts to meet our export commitments by availing market credit for raw material purchases and services, which turned out to be disproportionately expensive and at the same time constrained the quality. Market Credit instead of fair Bank facilites was at an unfair price, at an unfair interst for an unfair quality on unfair terms. Worse, the measures at such a high expense were not enough to fulfil all our export commitments on time.
Though we could not keep up the schedule initailly given, the buyer was so kind and considerate that he rescheduled the shipments by extending the delivery period. However, we could not meet this even this revised and lightened schedule, as our limits remained emphatically fixed at Rs 80 lakhs without even a marginal flexiblity. Whatever funds we were having had been invested in the fixed assets and we could not raise any finance from own sources.
We had submitted the proposal for enhancement in November 1999, but the bank sanctioned the enhancement only in August 2000. By the time the entire order became stale and we could not ship any consignment and the order was cancelled, since the importing company had to buy from other suppliers to meet their requirement.
Cancellation of orders had its own multiplier effect. The damage to the company did not stop with reduction in its turn-over and anticipated export profits. The various sub contract units entrusted with weaving, processing and tailoring job works started the work but we could not effect the payment towards their labour charges, again for want of adequate funds. When the PCL of 80 lakhs was sanctioned and disbursed, it was so late and so insufficient that it was just sufficient to meet our commitments to the yarn suppliers and we could not take back the stock lying with the processing units due to paucity of funds. ( In business, in practice, quite contrary to what the theory says, in a situation where the requirement of funds amounts to, say, a hundred thousand - required TODAY- and against this requirement if fifty thousand is made available a month too late, the problem does not get halved, the problem remains as it was, perhaps more intensified because what is made available too late disappears due to problems accumulated for want of timely response.) Therefore, we incurred heavy loss by way of stocks lying with the processing units which has now become unusable. Whatever stock could be saved, we recovered and are goods are under process.
Faced with the problems concerning non-availablility of a sanctioned term loan, severely restricted export credit facilities which remain frozen at Rs 80 lakhs and a total absence of condusiveness to avail alternate / additional credit facilites, we were unable to perform. There were specific opportunties to have our Export Credit Limits more than doubled by other banks which back-tracked due to resistence from Federal Bank.
The end result is our inablity to take up any of the several valuable propositions to import from our company. We require to be in a position to fund the required production before we commit to export. What we have taken up at the moment are local merchant export commitments totalling Rs 7 lakhs for high value terry towels, while we are unable to commit for voluminous and valuable exports.
The bank had considerable role in building up the situation to the present level. There was no timely advice from the part of the bank at any moment of time. There was no effort to understand our financial position and estimate our financial requirements in a realistic manner inspite of our repeated plea for 'a comprehensive reivew of our requirements'. The bank reacts to our recent non-performance entirely by its excessive focus on its own security of the funds advanced. The advances are more than well secured: the credit limits sanctioned to us are well secured with adequate collaterals; besides, the bank also holds the guarantees from both the directors and one of the family member of the directors. Therefore, there is no need for any alarm by the bank at this stage. The bank's concerns are restricted to its narrow perspective of our short term difficulties with total silence on its own role in crippling our ability to perform. This is not fair.
Earlier we had a practice of approaching the Regional Office or Head Office direct to represent our problems which was stopped as we had to heed the sentiments of the previous branch management. Even as our company was performing excellently during the first few years we had had our share of problems at the Branch and we did understand that there was a review by the Head Office and changes were effective at the Branch level. The present branch management has been considerably more businesslike, but paradoxically, these branch level changes have created excessive caution as far as this Branch was concerned and even the fact that our account happens to be at the Erode branch might have affected our banking opportunities.
Even now, the bank is not considering certain ways of reviving the unit making it a viable, profitable high performance in the pattern of its earlier growth trend until the unit faced its export credit problem.
We have now sought the assistance of a financial consultant and he is working on a comprehensive plan.
We are faced with two distinct problems: one is export performance for which we have substantial potential and avenues unexploited for want of funds. We can immediately start export of cotton yarn, which is less profitable but can boost our performance immediately. We had asked for a supportive commitment from the Branch to enable immediate yarn exports and the Branch has so far not committed on this. If the bank had enabled yarn exports we would have considrably brought down the over due PCLs to recently drawn PCLs. We require support facilities from the bank to enable us to take up yarn exports which can be an effective solution to the problem of overdue PCLs. If the bank could make a more comprehensive assessment of our Export Credit Needs with particular attention to the hardships we endured in the absence of timely assessment, we can commit to ship Terry Towels and other woven and made up products in large volumes as also begin selling direct to consumers on the internet by activating the built in e-commerce features at our website with one of the world's top ecom business web serices, already on the internet ( http://www.whitefieldcotton.net ). We once again request the Chairman to see this website.
The other problem is that interest on PCL is overdue in our account for the first time in 6 years, to the tune of Rs 8.10 lakhs. As advised by our Financial Consultant, we are now focussed on the task of clearing the whole accumulated interest. While it is difficult to fund for even a very minimal level of activity and all other overheads, we are faced with this interest overdue. The the Branch is categorical in its ruling that the interest has to be serviced before we can discuss any of our problems, which we agreed to abide by. We offered to sell one of our family properties to meet with this commitment and the bank urges us to do this. We have made arrangements to sell a property now set aside for the purpose one of family property to bring in additional funds and we are making progress on this front. However this process will take at least one more month as there is a delay in reaching an agreement on the price for the land to be sold. We assure you that we would be clearing all the arrears in interest within one month, once the sale proceeds of our property is received.
The Branch now threatens to issue us a recall notice. If the bank proceeds with the recall course it will only help to kill a promising industrial unit which has been contributing to the nation's export pursuits. We submit that it is unfair to throttle life out of our promising industrial enterprise which can produce certain and significant results.
We are now looking forward to the Chairman's attention, assistance, guidance and support to make this unit realize its promising potential. The recent export policy of the government of India has identified textile export as one of the potential area for development and has announced various concessions and benefits to improve the export performance in the textile sector. The recent report reveals that the textile export is on a growth path and there is wide scope for further enhancement of this trend.
We therefore, request you to consider the following facilities to us:
We expect the sale of our property to take one month. Please allow us one month’s time to clear the interest arrears.
We wish to take up yarn exports which would boost our export performance. Please sanction us a back to back inland LC facility to procure yarn and export.
We wish to be in a position to commit to produce and export terry towels, fabrics and other made ups. If are to make export commitments, we should be in a position to avail additional Packing Credits from the bank.
Please examine our requirements in this regard.
We are now even more determined to proceed with our manufacturing project. Even before we approached SIPCOT we did try to obtain the term loan facilities from Federal Bank in 1997. We had asked for a Term Loan denominated in Foreign Currency and the Head Office turned down with the observation that the Bank's exposure to foreign currency is limited to a maximum period of 3 years. The Head Office did not offer us alternatives such as a Rupee Term Loan. At present, in order to carry on the production, we needed some balancing equipments. We now request the bank to extend term loan assistance to build up inhouse processing facilities. If this is not possible we request the Bank to grant us minimal term loan facilites that we require immediately to balance our present manufacturing facilites. We are ready to offer additonal collateral securities to cover this limit.
Eventually we are to go ahead with our plans for a shuttleless weaving and soft flow processing unit. If the bank would prefer not to fund this expansion, we emphatically submit to the Bank to at least allow us to avail the required project finance from any term lending institution like SIDBI or IDBI. The bank has so far been unfavourable to this proposal and we were unable to make progress with our applications to the institutions due to this reason.
The success of any industrial unit depends upon the financial partnership also. If the banks do not understand the industrial enterprise's financial needs and extend timely help, even the most promising industrial units can not survive. We therefore, humbly request you to look into our request favourably and extend your support and guidance to turn this unit into one of the best textile manufacturing unit in South India. Should we get an opportunity, we are ready to make personal presentation about our comprehensive plan personally to you.
We look forward to a broader assessment and a positive response from you. Despite all the problems as pointed out above, the fact remains that it is Federal Bank that sanctioned limits to us to begin our existence as an export company. We are grateful to you for this original assistance and we still believe that a clear understanding of our requirements by the Chairman would enable us to emerge as one of the best performing textile companies.
With warm regards,
Yours truly,
M Sivasubramnaian.
Director
Whitefield Cotton (P) Limited
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