What Ails Diamond Industry the Most?

Reserve Bank of India (RBI) recently provided somewhat respite to the country’s diamond importers by allowing banks to approve clean credit facility given by foreign supplier to Indian importers of rough, cut and polished diamonds, even beyond 180 days. “To ease the operational difficulties faced by importers, it has been decided, in consultation with the Government of India, to delegate the powers for permitting such clean credit for a period exceeding 180 days from the date of shipment,” RBI said in a notification.

This may be a welcome step but still not enough for the industry that is suffering from many ailments and one of them being financial crunches. On the contrary, the global banking fraternity has tightened its lending norms especially for the diamond industry. London based Standard Chartered bank has recently tightened its terms for lending to the diamond sector. Now it insists on diamond dealers to provide more collateral or to take out insurance protection on their loans, without which they will have to pay higher interest rates or not have their debt renewed.

After frequent incidences of defaults in the industry, the banks have tightened their lending norms, which have literally suffocated the potential growth of the diamond sector in the country, feel the industry experts. Banks are said to have lost INR 8,000 to 10,000 crores in various default cases only in the diamond industry between 2007 and 2013. As a result, the industry leaders want government and the lending banks to tighten their noose around defaulters and recover money for the betterment of the entire industry.

Former chairman of India’s Gem & Jewellery Export Promotion Council (GJEPC) Mr. Sanjay Kothari says, “It is unfair on part of banks to punish the entire diamond industry for a few ‘bunch of black sheep’. Bankers and financial institutions have literally lost faith in the industry after a trail of banking defaults since 2007. The collaterals have been increased to over 100%, which were earlier used to be in the range of 20-30%. It is the right time that the government should tighten the noose around such defaulters and set an example for others falling in the line.”

On the other hand, bosses of banks allege that the diamond dealers rarely maintain any transparency. In a bank seminar organized by the GJEPC last year, the State Bank of India (SBI) Chairperson Ms. Arundhati Bhattacharya said, “The gem & jewellery industry has a huge prospective but banks are 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”.

Secretary-General of International Diamond Manufacturers’ Association (IDMA) Mr. Ronnie VanderLinden feels that the prime concern of the global diamond industry is its financial health and not the ‘undisclosed mixing of synthetics with the natural ones’. In the recent Newsletter of IDMA, Mr. Ronnie says, “For manufacturers, the diamond industry’s financial health is a number one concern. It is obvious that we will need a wider choice of partners when seeking to finance rough diamond purchases, and therefore, it will be one of the most important issues on the agenda for both IDMA and the WFDB to be discussed in the next World Diamond Congress”.

Israel Diamond Exchange (IDE) President Mr. Yoram Dvash says, “We must secure more credit lines in order to expand the business. Let us remember that the diamond trade does not only employ tens of thousands in diamond centers, but millions of people around the world – in Africa, India, China and elsewhere – are dependent for the livelihood on the success of the diamond trade.”

So, one cannot ignore the fact that genuine dealers are being ‘punished at the instance of some unscrupulous elements’ but at the same time, onus is on all diamond dealers (not some) that they should maintain greater transparency and keep their books clean.

Posted by Suresh Chotai