In the cover story this month, Diamond World team bring your excerpts from The Global Diamond Report 2014 by Bain & Company and Antwerp World Diamond Centre and also bring you the views of leading bankers, finance honchos and diamantaires. Read on to know more about diamond financing and ways to secure it.
The diamond report is on the verge of transformation and even more so in India as the banks’ stringent lending policies have raised the need for increased transparency. With Antwerp Diamond Bank winding down and most international banks stunting the credit limits, it now than ever more before that the industry needs to come together and work toward increasing transparency.
The diamond industry is an extremely capital intensive industry. It is said that 14 out of 15 diamonds in the world are cut and polished in India. Therefore, it is only natural that the cutters, polishers and traders are in constant need of capital to keep up with the global demand. The polished diamond trading and cutting and polishing account for the greatest share of financing demand from banks, states Bain’s The Global Diamond Report, 2014.
According to the report, since 2002, excluding the crisis year of 2008, the diamond-financing market’s growth has been robust, posting a compound annual growth rate (CAGR) of about 13 per cent before the crisis and a 23 per cent CAGR since 2009. During the same time span, the ratio of debt to the value of polished diamonds (a proxy for the diamond industry’s leverage) grew from about 50 per cent to about 73 per cent.
Diamantaires have augmented their leverage as inventory and collection cycles have elongated and profit margins have tapered, while banks must cope with bigger risk in the diamond industry as well as tighter regulation and industry-wide reforming.
Over the past decade, the industry’s outstanding debt has more than doubled. It is estimated at about $16 billion in 2013, including $1 billion in securitisations. Receivables financing accounts for more than 65 per cent of the market. India alone accounts for more than 40 per cent of lending, and Belgium, specifically Antwerp, is the second-largest market.
Traditionally, a limited number of financial institutions served the diamond market. They include diamond banks such as ABN AMRO Bank and recently wound down ADB, as well as Standard Chartered, which recently emerged as one of the leaders by market share; more than 50 Indian banks, among which State Bank of India holds the highest share; and Israeli banks, which have reduced their role since 2008.
In India, lending products and financing modalities vary from those in more developed markets. A product that covers a large share of the Indian market is the packing credit, which is a means of inventory financing; more specifically, the lender extends packing credit to the seller before the completion of asset rotation cycle. Typically the credit is unsecured and more risky than the receivables financing commonly used in other markets.
Since the crisis, several challenges to the industry have emerged. These challenges are spurring leading lenders to adopt more-conservative credit policies, pushing the diamond-financing industry to deleverage. The challenges are:
1) Industry leverage has increased significantly, largely as a result of increased borrowing by cutters and polishers and manufacturers in India.
2) Increasing stone certification has improved market transparency and boosted consumer confidence. At the same time, however, long waiting periods for certification have stretched the supply chain. In parallel, the increasing bargaining power of retailers has produced unfavorable payment conditions for their suppliers, such as jewellery manufacturers.
3) The margins of middle-market players have come under pressure.
4) The industry’s credit risk has risen as the ratio of nonperforming loans to assets has swelled from less than 1per cent to the 4–10 per cent range.
5) Tighter bank regulation, especially in the form of Basel III, has taken a disproportionate toll on corporate banking and SMEs.
6) The banking industry, especially in Europe and the US, has undergone a broad restructuring and in some case deleveraging, especially in the SME segment of their portfolios.
1) There are four potential actions for the industry to consider establishing a new equilibrium and contributing to the evolution of the operating model for diamond financing:
2) In the short term, it is crucial to increase transparency of company operations for middle-market players, by, for example, improving reporting standards and enhancing and automating inventory appraisal procedures.
3) Also in the short term, upstream and downstream players can take steps to support the middle market. Upstream players can organise road shows and other educational events; downstream players can coordinate ‘triangular’ cooperation among retailers or manufacturers, their banks, and their strategic suppliers.
4) In the medium term, new and more secure products—including structured finance and traditional trade finance structures—could be introduced.
5) In the medium term, traditional commercial banks could be encouraged to enter the market through closer cooperation with diamond banks.
6) The access of new players to the market would benefit both diamantaires, which would have access to a wider range of financing opportunities, and banks, which would be better able to diversify their risk exposure.
7) The outlook for the diamond industry overall is positive. For all stakeholders to capture the opportunities created by such growth, banks and diamantaires must cooperate more closely and develop more-secure products.
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