Stricter Bank Norms Now for Indian G&J Industry

Mumbai: Banks are tightening financing norms for the gems and jewellery industry after being forced to write off loans of more than Rs 10,000 crore, reports The Economic Times. Domestic lenders are tying up with global banks such as ABN Amro Bank and KBC Group NV to get information on their clients’ businesses overseas. Banks that do not have partnerships with foreign players are hiring auditors to monitor client books for diversion of funds and stock positions.

“There were some fraudulent players who hoodwinked the bank and took credit,” said Ramesh Ganesan, executive vice president, IndusInd Bank. Banks lost Rs 6,000 crore when they declared Winsome Diamonds and Forever Precious Jewellery & Diamonds as willful defaulters.

“This is no different from other industries where bankers have lost the money. Money was diverted into other business and lost. This is an intense familyrun business and anyone who does not concentrate on core business and diverted money has put banks to risk,” said Ganesan.

Some of the banks lent to this sector on the basis of their balance sheet — a move that backfired. Banks had an exposure of Rs 71,500 crore to the gems and jewellery sector at the end of April, according to Reserve Bank of India data. “Banks cannot lend based on balance sheet. One needs to understand the entire business of the clients and how they manage it with their suppliers and buyers,” said Ganeshan.

IndusInd Bank recently acquired Royal Bank of Scotland’s Rs 4,500-crore diamond and jewellery financing business and related deposit portfolio in India. The bank also entered into an agreement with Dutch bank ABN Amro to share skills in the diamond business. ABN Amro, through its network, will give the private sector lender information on what clients are doing in other markets.

This will help the bank weed out weak clients and have a better understanding of their cash flows. Other big players in the diamond business include State Bank of India and Standard Chartered Bank. “Problems were in two large accounts; there was no large-scale bankruptcy,” said R Gurumurthy, head, corporate and institutional banking at Ratnakar Bank.

“These cases went bad because these accounts were getting falsified and the others diverted funds to real estate and stock market, which created liquidity issues.” Gurumurthy said gems and jewellery is not an easy industry to finance.

“Banks are now getting smarter and understanding that these promoters have business in India, Hong Kong, Belgium and Dubai. Goods move freely across geographies,” he said. “We now work with the best of promoters, and banks in India now appoint auditors to track a client’s stock and order books overseas.”

Geetanjali Gems is also a worrying case for bankers as they have an exposure of Rs 4,500 crore to the company. “Banks have restructured the loan but the progress of the package is very slow,” said the corporate banking head of a private sector bank, requesting not to be named. The company is tweaking its business model and also looking to refinance to reduce its high cost debt.