Plunging sugar prices have forced at least one Indian sugar mill to default on bank loans and could drive others to do the same, the latest sign of the heavy toll a four-year-old supply glut in the country is taking on producers of the sweetener.

One of the country's largest sugar mills, Mawana Sugars Ltd, has defaulted on 2.5 billion rupees ($40 million) of outstanding loans from a consortium of lenders, according to an official from the company.

"We are losing 5-6 rupees per kg of sugar we produce. It is not viable to operate mills with the current pricing of sugar and cane," said Rajendra Khanna, a director at the company which posted a 245.2-million rupee loss in the three months ending in June.

"We have defaulted on term loan due to the disparity in cane and sugar prices," Khanna told Reuters by telephone.

Squeezed margins in sugar mills internationally, caused by depressed prices after years of global over-supply, are hastening closures and consolidation in the sector around the world.

In India, millers face an even steeper challenge as the government in the main cane-growing state of Uttar Pradesh, has told mills to pay 280 rupees per 100 kg of cane, compared to the 210 rupees recommended by the central government as its so-called 'fair and remunerative price'.

Uttar Pradesh's government is yet to come out with a cane price for the 2014/15 marketing year that started on Oct. 1, but most mills in the state have decided to suspend cane crushing in the new season unless the state links cane prices to sugar prices.

Sugar prices have fallen nearly 13 percent in the last 12 months. The state-advised cane price has climbed 65 percent in five years, while the sugar price has risen by just 1 percent.

Abinash Verma, director general of national lobby group the Indian Sugar Mills Association (ISMA), said key lenders such as state-run banks had stopped providing fresh working capital to mills and had asked Uttar Pradesh's government to change its cane-pricing formula.

"Unless the state government rationalises its cane pricing formula, we will see more and more sugar mills falling into non-performing accounts," Verma said.

The leading 14 sugar companies' cash-to-short term debt ratio has dropped to the lowest in at least a decade at 6.7 percent, indicating companies don't have sufficient cash to meet debt obligations, according to Thomson Reuters data.

"Some mills don't have money to pay the salaries of employees. They will default in coming months. They don't have an option," said a senior official at a sugar mill in Uttar Pradesh. He declined to be named as he was not authorised to speak with media.

Major sugar producers such as Bajaj Hindusthan, Balrampur Chini Mills, Shree Renuka Sugars and Simbhaoli Sugars posted losses in the June quarter.

All leading Indian sugar companies have low Altman Z-Scores, which measure the likelihood that a firm will enter bankruptcy within the next two years, according to the latest data from Thomson Reuters Starmine.

BROKEN CYCLE?

India is set to produce surplus sugar for a fifth straight year, suggesting the country's notorious cycle of glut and deficit in sugar supplies could have broken, said Ashok Jain, president of the Bombay Sugar Merchants Association.

"Prices will remain under pressure due to ample carry forward stocks and good production prospects," Jain said.

The South Asian country started the new marketing year with 7.5 million tonnes of so-called carry-forward stocks and is expected to produce 25 million to 25.5 million tonnes this year against local consumption of around 23 million tonnes.