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Diamond Loans Worth $5B Diverted to Real Estate, Rough Speculation

12 september 2012

The liquidity crisis in the local diamond industry  is the worst  in 50 years, but it is nothing but man-made, unlike the crash of 2008 following the global economic downturn. And, no one else except for the big and medium diamond companies, who enjoy huge credit lines with the Indian banks, are to blame, Times of India reported cited by Rapaport.
As per industry estimates, several diamantaires have diverted at least $5.39 billion (INR 30,000 crore) worth of working capital loans that were borrowed from the foreign, private and national banks, into the real estate sector and for speculative buying of rough diamonds since 2010. Now, with the downturn in real estate too and falling rough prices, big players are finding their investments stuck.
A major chunk of these loans were borrowed through round-tripping, through which a small tribe of diamond traders got cheap finance against export of same set of diamonds over and over again. They used the finance obtained from several high-street lenders to dress up past losses on their books, carry out speculative deals in rough diamonds and for diverting substantial part in the real estate sector.
These loans were mostly borrowed for export finance at London Interbank Offered Rate (Libor) from the banks and that it works out 5.5 percent to 6 percent cheaper than minimum rupee loans extended by banks.
"A huge amount of cheap bank finance availed by a few black sheep in the industry has been diverted to real estate and speculative deals in rough diamonds since 2010. The money is being pumped out from the diamond pipeline and this is creating a lot of problems for the rest of the players," Sanjay Kothari, the vice chairman of the Gem & Jewellery Export Promotion Council (GJEPC), told Times of India.
Calling the export figures false and manipulative, Kothari said, "The export of $28 billion worth of polished diamonds and the import of $20 billion worth of polished diamonds in 2011 was the classic example of round-tripping. India is a diamond exporter and there is no need for importing polished diamonds. This shows how the 'black sheep' have played the trick to misuse the bank finance."
"The industry players can't be allowed to misuse the public money borrowed on cheap interest rates from the banks for their personal gains," said Martin Rapaport, the chairman of Rapaport Group, a leading U.S.-based service provider for diamond and jewelry industry.