WILL THE BANKS AND TRADE SHAKE HANDS AGAIN?

The last few years have been a trying time for the Indian diamond trade. Frequent reports of fraudulent incidents by diamantaires have left a bad mark on the industry and banks have lost trust in the trade. Extreme caution has led to extreme measures by banks and the ones suffering greatly are small and mid-scale dealers. Aroma Sah Anant speaks to bankers and industry insiders to understand what they expect from each other and what the future holds

It was around this time, a year ago, that an arrest warrant was issued against diamond trader Nirav Modi. Punjab National Bank (PNB), India’s second biggest staterun lender, accused fraud to the tunes of Rs 13,000 cr — it shook the nation, triggering a massive probe and came as a big blow to the multi- billion diamond industry in India. Soon enough, banks pulled back from financing the diamond trade and even asked traders to return 30 per cent of the money lent, a move that crushed the small and mid-scale diamond traders.

Similar to other trades, the diamond market has been dependent on financial support from banks, primarily Public Sector Banks, to procure raw materials, operate the working capital cycle efficiently and meet unexpected demands. However, in the wake of frauds and money laundering incidents involving diamond traders, banks revisited their credit policy which resulted in tightening of rules. Resultantly, collateral (in the form of cash and enforceable immovable property) have been raised considerably for poorly rated borrowers and new customers — a move that has greatly impacted mid and small-scale diamond dealers. From 15 to 20 per cent collateral, they are now being asked to shell out 25 to 50 per cent, over and above prime security. Vipul Shah, CEO and Managing Director, Asian Star says, “This is not practical. If the small lenders had that kind of collateral, why would they go to the banks in the first place?”

Nilesh Chhabria, COO, Finestar Jewellery & Diamond Pvt Ltd says, “Because of people like that of Nirav Modi, even companies that are producing the right balance sheets are getting affected in a major way. Banks are really scared right now. They are trying to keep their credit lines strong. My company is in the process of putting up factories in multiple locations, so we need funding. But public banks are not giving loans. Banks are stricter and the scrutiny faced by our industry is much more than any other.”

Diamond traders and industry insiders agree that the banking sector has lost their trust in the industry. Shah adds, “Big banks such as ADB and Standard Chartered have stopped the funding.”

A Chief Manager at the Indian Overseas Banks in Ahmedabad, who spoke to us on condition of anonymity says, “When incidents like Nirav Modi and Mehul Choksi occur, all the big fish escape. The first accountability falls on the head of the banker who had cleared the loan. On a personal level, my career suffers. So, yes, I find myself insecure, which makes me extremely cautious when the borrower is a diamond dealer.”

An Assistant General Manager at IOB, Zonal Audit Office, who spoke to us on condition of anonymity said, “Bankers sanctioning loans have little to no knowledge of diamonds. Plus, diamonds are such a high-value movable commodity that if banks don’t increase collateral then they are doomed.” He explains, “As a person of banking, I can’t assess the genuineness of a stone. I have to take the borrower’s word on the valuation. Once we do provide the finance, I can’t sit in the showroom or workshop of the trader every day. So, if the diamonds are being moved, and they can very easily, I will not know. Which is why high collaterals are needed.”

Ankit Shah, Director, Ankit Gems agrees with bankers. He says, “Diamond trade is a specialised industry that takes time to be fully understood. On the banks’ side, the turnover is so frequent that by the time the banker comes to understand the industry substantially, he is transferred. Plus, they have so many other procedural work to do. In this regard, private sector banks are in a better position.”

It is true that valuation of diamonds has been a huge issue. Certain banks operated on trust, lending to the sector on the basis of their balance sheet — a move that cost them dearly.

RA Krishna, Strategic Consultant in the BFSI space says, “How do I put my trust into someone I don’t know? So, when the banks or the banker do not understand the business completely, I don’t see what else the banks can do if not increase collaterals.”

Shailesh Sangani, Founder, Priority Jewels says, “Bankers feel that the industry is opaque. They want clarity. While diamond merchants are saying that they are absolutely clean. It is the typical Indian story of a couple of apples gone bad. But banks are funding every sector without fully understanding it. So for them to claim that they don’t understand the diamond trade is very farfetched.” Vipul Shah adds “The council has always taken proper steps — there is constant dialogue and regular meetings with bankers where all necessary inputs and insights of the industry are provided.”

The Need of the Hour
According to GJEPC everyone has a role to play in mitigating risk — traders need to ensure total transparency, register on MyKYCBank and adopt stock maintaining tools. On the other hand, banks must set up long term credit risk investigation team, assess limit in dollar term, provide gold card benefits, and inform GJEPC about defaulting members.

Another solution çan come from the council reaching out to the government and its bodies with solutions such as funding the SME sector, providing reforms and incentives to promote the trade, and the GST council to look into the release of blocked working capital.

Ankit Shah suggests, “Given the frequent turnover of bankers, GJEPC should organise more frequent seminars for them. Additionally, the council needs to instill more confidence in the banks. After all, the best way to fund your company is to use bank finance.” He also suggests setting up of an internal fund by traders, jewellers and the national federation to act as a guarantor to the banks. “This will rebuild the bank’s trust in the trade,” he explains. “It is a long-term process and transparency is key. Traders seeking loans need to show their business policies and communicate with the banks frequently on good as well as bad news. Don’t hide anything.”

Vipul Shah adds, “GJEPC organizes banking seminars. This is the platform where all stakeholders and government machinery will come together. New ideas are discussed and a solution may be reached.” He adds that the government plays a critical role to get the ball rolling again. “There are 15 to 20 lakh workers that the business employs. This should be enough for government’s intervention and support. RBI too needs to ensure that the banks are in a better position. There is huge scope in the gems and jewellery sector with massive growth prospects especially given the ongoing trade war between U.S. and China.”

Srikantha Mandyam, Ex-Senior Manager and Brand Head, Allahabad Bank at diamond cutting and polishing centre Surat says, “As of now, unless the overall sentiment improves the relationship between the banking sector and diamond trade will stay strained. To undo that, recovery of lost funds or government intervention with more finance is a must. The government needs to provide adequate capital. They haven’t done much so far.”

The diamond business involves a lot of money and it is critical for the bank to know where its finances are getting parked. “As a long-term solution I only figure block chain,” says Chhabria, whose company Finestar is on Tracr, a blockchain-based programme built by UK-based diamond mining and trading company De Beers. Here, a complete history of diamonds from its origin to every hand it passes through can be tracked be tracked. This online ledger, he says, “will make the business clean, transparent and secure. It will be especially beneficial for the banking sector and insurance companies as the wrongdoings of the businesses will deteriorate.