Defaults have been haunting India’s gem & jewellery industry since long. It has increased post 2008 melt-down with as big as Rs. 6000 crore by a leading diamond firm. This has badly shaken the trust and faith of banking sector in India’s gem & jewellery industry. As a result, banks here have become quite cautious in their dealing with the industry and have frequently raised suspicion towards its style of functioning.
India’s Gem & Jewellery Export Promotion Council (GJEPC) is highly concerned about such occurrences which harm the overall interest of the industry to a great extent. With intent to prevent further damages to the industry, the GJEPC had recently organized a Banking Summit in Mumbai wherein the industry leaders tried to narrow the gap of increasing rift between the bankers and genuine traders of the industry.
Mr. Vipul Shah, Chairman of the GJEPC said, “We urge the banks to develop their own risk management systems remaining close to the market and business where it happens to mitigate their risks for high value products like us. We have also requested the Finance Ministry to either increase the capital base of the Export Credit Guarantee Corporation (ECGC) or ask insurance regulator Insurance Regulatory and Development Authority (IRDA) to permit domestic insurers to open up to the sector, which can allow banks to take international credit guarantee institutions coverage. During last few years, our manufacturers and traders have expanded their global presence and today a major chunk of their revenues are derived from the international as well as domestic markets. Therefore we need enlarged insurance coverage.”
GJEPC has requested the government to consider sanctioning of credit guarantee under the export credit insurance scheme for banks to sanction incremental limits by banks. The apex body of the industry has also asked to extend the interest subvention of 3% for the entire sector.
State Bank of India (SBI) and Bank of Baroda (BOB) expressed that a portion of the gold deposits held by banks should be treated as part of the Mandatory Cash Reserve Ratio (CRR) or Statutory Liquidity Ratio (SLR).
Speaking at the event, SBI Chairperson Ms. Arundhati Bhattacharya said, “After all gold is a store of value and is it possible for the regulator to treat a bit of our gold deposits as CRR or SLR instead of cash or government securities?”
Ms. Bhattacharya reiterated that the gem & jewellery industry had a huge prospective but banks had been retreating from it because of its ‘opacity’. “The industry people must understand that there has to be wider clarity on how value is moving. There is very little transparency in the industry as to which part of the business is using what funds and what is the value and margins in each section of the business. We should also realize that systems in the world have changed and banks need to fall in line and as they do so, they will surely expect that corporates and borrowers also fall in line. Where they cannot be directly controlled, the regulators will impose on the banks greater provisioning requirements making it impossible for banks to do business.”
At the end, Ms. Bhattacharya suggested a short term measure in form of 3 Cs. Confidence building, corporatization of borrowers and players in the industry to bring in more clarity, transparency and corporate governance thereby giving more comfort to the regulators and bankers and the third would be collateralize that would bring down risks. She hoped that these measures would put the industry on a much better footing.
Mr. S. S. Mundra, CMD of the Bank of Baroda said, “There is a huge trust deficit prevailing these days. It has been said diamonds are forever but like diamonds, diamond merchants should also be forever. Intermingling of gold, diamond and jewellery business by the industry people is making it difficult to separate business streams and understand their workings. Also, some companies indulged in interest rate arbitrage. So there is concern about selling on a consignment basis, as well as sales to associates.”
The panel discussions clearly indicated that bankers in the current scenario of occurrence of many NPAs strongly feel that the industry now needs to be more transparent in their business operations. Due to lack of transparency in the industry, the confidence of bankers has been shaken which is making them reluctant to finance this industry to a large extent. Whereas the industry on the other hand feels that it is high time bankers initiate procedures to share and adopt best practices for each other to minimize their risks.
The Bankers were also really concerned about ECGC’s refusal to do ECIB policies for enhanced credit limits. Whereas everybody agrees that this is not the ideal situation and will be a big hindrance in growth of exports, there is a general disagreement on who will take the risk ultimately, the banks or ECGC. The Industry clearly believes that , whereas banks cannot outsource their due diligence obligations and mitigate risks by only taking policies from ECGC on exporters turnover, at the same time ECGC should have adequate paid up capital from government to provide requisite covers to the high value industry like the Gem and Jewellery industry.
Mr. N. Shankar, CMD,.ECGC stated that they need to limit their exposure to a particular industry and also cannot take the ECIB cover at its face value, which is sanctioned by the banks. However, he has promised to take up the issue of increase in capital and deduction of exposure limit from 50% to 40% which would further ensure the growth in the industry. The decision of introduction of multi-buyer policy has also been well received by the industry.
Bankers need to carefully and minutely follow the due diligence procedures and employ personnel for regular interaction with the industry. Banking developments like BASEL III regulations and provisioning of extra capital for unhedged foreign exposure by banks has impacted the industry. Bankers strongly feel that the track record of the promoter of the company needs to be assessed and examined carefully before financing his/her company.
The positive side of the Summit was that all participants agreed to form a Working Group comprising of representatives from both sides to suggest measures to re-establish the depleting trust, improve transparency and put the industry on a much better footing.
Posted by Suresh Chotai
