Much water has flowed under the bridge since the Indian diamond industry began its sojourn overseas many decades ago... to export polished diamonds! Today, India is a major player in the global diamond and jewellery business, aspiring to become the diamond trading centre of the world. The Indian industry has all along depended on expertise and finance for the growth.
And it is needless to say that bank financing has played an immense part in its growth and success. But, the industry has been on logger heads with the diamond financing banks for years now. While the small units accused banks of step-motherly treatment as they felt they were sidelined, the larger companies with sufficient collateral to offer enjoyed all the lending banks’ benefits. But things are beginning to change, albeit slowly, as The Gem & Jewellery Export Promotion Council of India (GJEPC) is putting in all efforts to help small and medium sized enterprises get their due share of help from lending banks.
Currently many Indian banks are into financing diamond business, but State Bank of India is the country's largest lender. The bank has exposure of more than US$2 billion to diamond and jewellery companies in India, and US$600 million abroad. Its clients' NPAs are equal to about six percent of the total exposure. Antwerp Diamond Bank, Royal Bank of Scotland and Standard Chartered Bank are the three foreign banks, who together have substantial exposure as well. It is said that Antwerp Diamond Bank alone currently has $20 million of NPAs financed to four large Indian firms, out of its total credit to the Indian diamond trade of US$100 million.
During the initial stages of the Indian diamond industry, diamond business was not an organised sector but business was strong. Lending banks bent backwards to lend the businessmen, as it was a lucrative investment idea. The cottage industry, though fragmented, was on strong fundamentals and the bankers were sure of getting their money back and more. Today, however, the industry has grown multi-fold and it is one of the largest foreign exchange earners in the country. In the past, India manufactured mainly small diamonds; and India was considered as only a manufacturing hub. But, the present scenario with 14 out of every 15 diamonds cut and polished here; and with 70% in terms of value and 85% volume, India is now undoubtedly the world's largest manufacturing centre. The Government of India has been supportive of the G&J sector in that it had declared the sector as the thrust area for generating India’s export demand.
After the 2008 financial crisis in India, a number of major diamond manufacturers and export-oriented firms went bankrupt, leaving the banks with bad loans. The finance scenario underwent a complete change after the 2008 fiasco. Companies had to improve and handle risk management, currency fluctuations etc in a more professional way. On the other side, Banks too have had to integrate closer with the industry to deal with credit risk, re-insurance and so on. This led to lending banks becoming tight-fisted when dealing with especially small and medium sized manufacturing units. Besides, banks had to tackle the question of transparency, economic upheavals, business growth affected by prices, consumer demand etc of its clients, which made banks become a little cautious in lending
But diamond financing banks on the whole have fared quite well. Some banks were negatively affected too by a few bad apples, who have taken advantage of legislative loop holes resulting in diamond tripping or payment defaults and sometimes due to stretched receivables or their own deliberate delays. But majority of companies/clients of lending banks have performed well in accordance to the banks’ norms. Of course, though some of the late payers/defaulters to the bank had valid reasons, some bad accounts created uneasiness in banking circles. So, it is not surprising to see that steps are being taken by GJEPC and other industry organisations, to ensure that the relationship between lending banks and industry borrowers are comfortable and trustworthy. Considering the immense hard work and efforts that has brought India its global leadership position in diamonds and jewellery sector now, the Council would not like to see it go in vain.
From the bankers’ view, lending banks in India are cautious and rightly so as they feel that they will have to be stricter, focus more on corporatisation and clients’ external and internal investment grade ratings. The jewellery sector being a little more complex than loose diamond manufacturing, the banks also feel the need to expand exposure in diamond jewellery sector but at the same time following prudent risk management norms.
Recently, the Public sector banks (PSBs) in India decided against giving extra credit limits to gems and jewellery units. This step was taken as Export Credit Guarantee Corp of India Ltd (ECGC) had clamped restrictions on giving additional risk cover on this portfolio, as it has to work under certain norms. So, without adequate risk cover, public sector banks will face limitations to take additional exposure. Of late, the pace of bank lending to the G and J sector has slowed down to 19.2 per cent in February 2013 from 28.5 per cent a year ago. According to The Reserve Bank of India, the outstanding exposure was Rs 58,400 crore in February 2013. The ECGC is understood to be currently in the process of reviewing internal guidelines.
Given the current scenario, foreign banks involved in diamond sector financing are set to gain a larger market share in India. Three foreign banks are in the fray now. Antwerp Diamond Bank, Royal Bank of Scotland and Standard Chartered Bank - have exposures of US $200 million, US $710 million and US $280 million, respectively in the Indian market. Therefore foreign banks which do not use the ECGC insurance but have different arrangements to cover risks will pick up business and prosper.
It is estimated that, as of now, nearly 50 banks provide about US $4 billion (Rs 22,000 crore) to leading diamond and jewellery companies in India and abroad.
The diamond/jewellery industry, however, have their own challenges to conquer. More so the jewellery sector which faces non-availability of Gold pan India, though imports are now allowed. Another woe is high cost of finance, in comparison to what is prevalent globally. that ate into the profits. The jewellery manufacturers therefore feel that Banks should also take note of the fact that in the jewellery sector, where inventory turn was low, there is need for high working capital; besides capital for technological up gradation; and rising gold prices too. To add to the problems, the Basel III norm active from April 1, 2013 has increased the cost of borrowing as well.
Jewellery manufacturers also feel that they should be assessed differently from cut & polished sector. According to them, besides delinking both these sectors, there should be different norms for both while extending banking finance. They also expect to be allowed inter-changeability between post-shipment export finance, packing credit and gold loan limit for jewellery units and also feel Banks should be flexible for routing of export documents.
In a bid to build confidence between the diamond and banking sectors, which of late has been on a shaky ground, the GJEPC organised the ‘Emerging trends in financing of Indian diamond and jewellery sector’ symposium recently. The aim was to bring the Indian industry face to face with the finance and banking sector and enable them to talk about bringing in the much needed transparency.
Lately, the GJEPC has intensified measures for corporatization of small and middle sized units in the diamond cutting and polishing sector, to enable banks to get concrete information to assess the companies while sanctioning loans. However, the diamond industry on the whole is resilient and driven, but low margins; price and currency risks make it susceptible to failures and losses at times. The industry should focus on transparency and governance, which will bridge the gap between industry and the lending banks. The GJEPC has, in many cases, mediated and handled default cases, thus creating a sense of confidence in Banks to retrieve their monies. The recently organised GJEPC Banking Summit emphasized on giving a leg up to transparency in diamond and jewellery industry. So, the banks are heaving a sigh of relief? Clearly no...at least not yet.
If Indian banks are being more cautious in providing financing to diamond companies, including sightholders of diamond producers De Beers and Rio Tinto, it is to prevent a further rise in their non-performing assets (NPA). Banks have planned to step up their monitoring of the asset quality of borrowers in the diamond industry before approving new loans. Banks are wary as the diamond stocks held as collateral are not fixed assets which can be disposed of at any time. Besides, stocks also pose a holding risk that banks would keep in mind before lending. According to reports, Banks are now demanding collateral of 25-30 percent from sightholders of Rio Tinto and De Beers requesting loans. So, it goes without saying that the small firms are finding it difficult to qualify for finance as banks can even demand for 100 percent collateral, if they find it necessary.
All said and done, it goes without a doubt that the future will see banks stressing more on authenticating companies' collateral in assessing loans applications ; quality of lending will be given due diligence; transparency & corporatisation in the industry will be called for and; credit rating agency’s assessment will be taken as a reference. On the on sight, it looks like a difficult scenario to do business in the Indian gem and jewellery industry, but it goes without saying that a well organised business scenario with all the systems in place will augur well for the industry, eventually.
Aruna Gaitonde for Rough&Polished, from Mumbai
