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Redefining diamond financing, together

14 july 2014

When the Gem & Jewellery Export Promotion Council (GJEPC) hosted the chairmen of almost all diamond financing banks in India, CMD of ECGC (Export Credit Guarantee), Secretary, Ministry of Finance, gems and jewellery industry members and other institutions at the Diamond, Gem & Jewellery Banking Summit 2014 at the Taj Mahal Palace Hotel in Mumbai, apprehension was in the air. The news of payment defaults were still fresh in the minds of the industry members as well as the bankers. However, as the gems and jewellery industry needs the banks, so do the banks, which have already loaned substantial amounts to clients in the industry. Besides, it is widely understood that the Indian gems and jewellery industry is one of the fastest growing sectors; and financing this sector makes sense for banks and their businesses as well.

But with lending banks, globally as well as in India, becoming extra cautious in financing the gems and jewellery sector due to various reasons like frequent defaults, terror associations, failures in businesses and bankruptcy and so on and so forth. To mitigate the negative atmosphere around the industry and to find ways to tackle the risk factor which the banks are unable to accept,  the GJEPC organized this summit for the second time to bring together senior officials fr om the Banking, Gem & Jewellery Trade and Ministry of Finance of the Government of India (GOI) to discuss the current issues on financing for the gem andjewellery sector; look at the current scenario of ECIB and Credit Guarantee in gem andjewellery industry; and other issues faced by the export-oriented industry with regard to banking and finance.

In his welcoming address, Mr. Vipul Shah, Chairman, GJEPC, said, “I am privileged to address the Banking, Gem & Jewellery Trade and Ministry of Finance officials and have the honour to organise this Diamonds, Gem & Jewellery Banking Summit 2014 again, after a successful Summit in 2013. The first Summit helped our Industry and the financial institutions of the country - the ideal and equal partners - to create a workable synergy. I would also like to thank all the banks and financial institutions who have helped this industry in its journey over the last four decades. If we have found out some concrete directions about how to increase that synergy, trust and confidence, then we have earned the day.”

Due to the series of loan defaults in the past few years lending banks are cautious and with a view to minimize in extending loans, asked for GJEPC’s help to act as mediator in recommending the financial standings of the diamond firms seeking business loans and current credit limit enhancement. Besides the diamond financing banks, bureaucrats of the Central Government and officials fr om the Export Credit Guarantee Corporation of India were in full strength at the summit. Not surprising though that the confidence of Indian banks was at an all-time low following a series of loan default cases by borrowers. A rough estimate indicates that the bad debts fr om the diamond and jewellery sector have gone up to touch Rs 10,000 crore in the past seven years.

On the sidelines, referring the banks’ request, Vipul told the media, “Lending banks want the council to give recommendations on the financial standing of the diamond and jewellery companies seeking loans. If the council doesn't know a company's standing then the banks need to do a ‘due diligence’ before sanctioning the credit. Earlier, we were hesitant on the suggestion given by the banks, but now we have started to think in that direction. We are going to seek advice from the council's legal department.”

The Indian Government was represented by Dr. Gurdial Singh Sandhu, Secretary, Financial Services, Ministry of Finance, GOI, who  said that, “In context to the current global economic scenario, the Indian industry needs to adopt international practices whole heartedly, to grow both nationally and internationally. The government of India was compelled to act stringently in the larger interest of the country by raising import duty on gold and introducing 80:20 gold import guidelines. The new Central Government is determined to serve the needs of all industries and we hope its full cooperation and support for the same by announcing more developments in the coming days.” He also added, “Export is a priority sector for the government of India and necessary steps will be taken by the Government to ensure its growth in the international market.”

The bankers were very clear about what banks need from the industry clients and both Mr. S.S. Mundra, Chairman, Bank of Baroda and Ms. Arundhati Bhattacharya, Chairman, State Bank of India, rightly pointed out that industry players need to be more transparent in their business operations and more compliant in the context of the changing banking scenario in both national and international markets. Ms. Bhattacharya also pointed out that the industry needs to maintain 3Cs: Confidence, Corporatization and Collateralization. She also stressed the fact that the change in the international banking scenario will also impact the Indian banking scenario which the Indian gems and jewellery industry needs to understand. 

Both the leading bankers, Mundra as well as Bhattacharya expressed their full confidence in the gems and jewellery industry and their strong belief that the industry had full potential to strengthen its leadership position in the international market and also attract foreign direct investments in the country. They also believed that the future of the industry seems to be positive as demand for gems and jewellery items, both in the domestic and international markets, has shown improvement.

However, they expressed their deep concern that certain market events happened in the industry post the 2008 global economic recession, which have created a large trust deficit between the bankers and the industry. The current collective challenge is to uphold the trust shared between the bankers and traders and there is further need to strengthen the same to ensure this long fruitful association continues in the future. It is also a good sign that bankers, too, feel that they need to interact with the Government to discuss the issue of financing the consignment sale of jewellery from Special Economic Zones, especially the SEEPZ at Mumbai.

Using the summit as a platform, lending bankers asked the Reserve Bank of India to include a portion of their gold deposits to meet the statutory pre-emption requirements relating to either cash reserve ratio (CRR) or statutory liquidity ratio (SLR), both of which banks consider as non-productive. Bhattacharya stressed, “With gold imports having pressurized the current account gap in the recent past, there is a greater need to make use of gold available in the country and make it more liquid.” She said that as one of the largest players in the gold deposit scheme segment, SBI is not able to deploy the available idle gold deposits into productive assets.

Agreeing with Bhattacharya, Mundra said it “makes sense” to treat a part of banks' gold deposits as CRR and SLR. “When banks are holding gold, it is of value. I think it makes sense to bring under CRR/SLR. It also fits the larger pattern that ultimately we are talking about unearthing the gold and bringing it to productive sectors in the economy as a whole. The gold that is readily available can be brought under recognition,” Mundra said on the sidelines.

Dr. GS Sandhu acknowledged that the ministry has received several representations on ways to better utilize gold deposits and it is actively looking into the matter. “So much gold is lying idle. In some ways if we can monetize this, may be our imports will come down drastically. Something in that direction we will have to think of,” Sandhu added.

The current scenario of occurrence of many NPAs took centre stage during the panel discussions, indicating that the bankers felt strongly about transparency and corporatization of companies. Bankers felt that the industry now needed to be more transparent in their business operations and that due to the lack of transparency the confidence of bankers has been shaken. The bankers rightfully claimed that that was the reason which is making them reluctant to finance the gems and jewellery industry to a large extent. The industry members, on the other hand, felt that the bankers understood the business of diamonds, jewellery, etc., which have different working procedures, and accordingly deal with the companies to minimize their risks. Industry leaders requested that banks be more supportive to SMEs (small and medium enterprises), who are a major and important part of the industry. Russel Mehta, MD, Rosy Blue (India) very candidly said that most lending banks have not invested in risk management systems; and that they should invest in collecting information on clients to be successful in diamond financing.

The bankers expressed concern about the ECGC's refusal to do ECIB policies for enhanced credit limits. While all agreed that this was not the ideal situation and will be a big hindrance in growth of exports, there was a general disagreement on who will take the risk ultimately, the banks or ECGC. The industry was clear that when banks cannot outsource their obligations and mitigate risks by only taking policies from ECGC on exporter’s turnover, at the same time ECGC should have adequate paid up capital from the government to provide requisite covers to the high value industry like the gems and jewellery industry. 

Mr. N. Shankar, CMD, ECGC stated that ECGC caters to many sectors and not just the gems and jewellery industry and therefore needs to lim it their exposure to the latter; and also cannot take the ECIB cover which is sanctioned by the banks at its face value. He, however, promised to take up the issue of increasing capital and decreasing the exposure lim it from 50% to 40%, which would further ensure the growth in the industry. Shankar’s announcement of ECGC’s decision to introduce a multi-buyer policy was also well received by the industry.

In an attempt to ease the capital deficit in ECGC, so that it can take care of the needs of high value sectors like gems and jewellery, Vipul Shah has reportedly requested the GOI to increase its contribution at ECGC. Shah pointed out that while “sanctions” have been given for new loans by banks, they cannot be utilized as ECGC has refused to provide credit guarantees to banks on exports against the enhanced limits. The only other alternative put forward by the banks to the exporters is by providing 50% collaterals, which is not realistic for this high value industry. Insurance seems to have become the preferred risk management for banks, from which the entire gems and jewellery industry suffers.

Shah added, “One of our other key demands is to the IRDA and that is of opening of the gems and jewellery sector to allow banks take covers from the international credit guarantee institutions. This will allow the banks to mitigate the risk factor and that the flow of credit in the gems and jewellery sector could be increased.” Shah also said that “while the banks are in the business of financing, many in the industry are in the business of diamonds, gems and jewellery through generations. Both businesses can only run through trust, relationship and goodwill. There is no other way in running these businesses. Thus, the banks need to trust the inherent strength of the sector and walk together.”

Over the last few years, manufacturers and traders have expanded their global footprint and today a large portion of their revenues are derived from the global as well as domestic markets, hence the need for enlarging the insurance coverage, he said. GJEPC has also requested the commerce ministry to consider sanctioning of credit guarantee under the export credit insurance scheme for banks to sanction incremental limits by banks. It has also asked the government to extend the interest subvention of 3 per cent to the entire sector.

Shah added that “banks should also support us in our demand to increase the period for granting of supplier's credit from the RBI stipulated lim it of 90 days as the trade is facing a serious crisis due to the same. We want banks to look into our high financing and transaction costs for our exporters and cap it to some limits.” In conclusion, one can say that bankers need to carefully follow the due diligence procedures and employ personnel for regular interaction with the industry. Banking developments like the BASEL III regulations and provisioning of extra capital for unhedged foreign exposure by banks has impacted the industry. Bankers are right if they feel that the track record of the promoter of the company needs to be assessed and examined carefully before financing his/her company. And most importantly, borrowers should remember that it is not their money to squander away but utilize it judiciously and repay loans to the lending banks on time.

Aruna Gaitonde, Rough&Polished, India