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Defaults in textile sector on an ascending curve
Feb '09
The textile and garment industry is a very capital intensive industry. Its liquidity requirements, whether fixed or working are very huge. Investment in land and machinery is substantial and after that the company needs to invest in raw materials like cotton, most of which is bought in advance during the beginning of the season, to fulfill requirements of the full year.

This has led to a huge exposure from banks and financial institutions in to the sector. The textile sector accounts for as much as 22 percent of loans extended by banks to all sectors. But since the beginning of the slowdown from September 2008, defaults in prepayments of loans have begun to shoot up from within the textile industry.

The spinning sector which has the largest exposure, from amongst the industry, has been facing problems since the last two years. Last year, there were severe problems in electricity supply, leading to cutback in productions and the industry was also faced with problems with regards to supply of gas and its pricing adopted by the then government.

But now the hens have come home to roost. The textile units have been trying to avoid a bankruptcy in the last few years. But with the wheels of motion, i.e, production and sales cycles being affected due to the recessionary trends, the textile units are facing severe liquidity problems leading to more and more defaults tumbling out of closets.

The government has assured of announcing a textile package to revive and stabilize the industry, which if not forthcoming early, could lead to disastrous consequences in the textile sector, leading to the same consequences in the banking and financial sector and has the potential to disrupt the economic cycle of the country.

Fibre2fashion News Desk - India

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