Diamond firms face working capital squeeze
Jewellery manufacturers and retailers have started facing a working capital squeeze, due to intensified scrutiny of the sector from banks, with multiple numbers of officials needed now to sanction loans.
This follows the ~127-billion Punjab National Bank (PNB) scam, involving Nirav Modi and Nehul Choksi’s Gitanjali Gems. The new caution on loan disbursal apart, it is also close to the end of the current financial year, with most companies having already used their full credit limit — little remains for disbursal.
Even so, whatever is left to give out has had bankers dallying on disbursement, with additional formalities. And, banks have become more vigilant, with many more officials involved in loan approval and disbursal over the past two weeks.
Disbursal of already approved loans is also affected. So have the opening of new Lines of Credit (LCs), hitting the implementation of export orders.
While the impact on working capital has been limited so far, it is likely to intensify with the new sanction limits from April 1, when the next financial year begins.
“All companies in the gems and jewellery business have been impacted due to the unusual slowdown in the entire banking system after this scam (surfaced). Those who borrow working capital have seen lower sanctioning and disbursal. Companies like us which do not raise working capital from banks have also been impacted due to inordinate delay in opening of LCs,” rues Rajesh Mehta, chairman of Bengaluru-based, Rajesh Exports, a global presence in the gold sector.
“Banks have intensified vigil through involvement of more officials in loan disbursal. Similarly, opening an LC requires several hours; it used to take a few minutes. Similar difficulties have been faced by jewellery exporters in getting paper clearance.”
Normally, new sanctioning of credit limits come for approval with the beginning of the new financial year in April; existing ones come for review in October.
“Many small and medium enterprises willing to raise working capital between ~1 billion and ~5 billion face huge problems in availing of credit due to lack of collateral. On the other hand, banks have sanctioned billions of rupees to large corporates without any collateral. We have been meeting bank officials on a consistent basis and trying to convince them that these two companies (Modi’s and Choksi’s) do not represent the entire $43-billion gems and jewellery industry in India,” said Colin Shah, vice- chairman, Gems and Jewellery Export Promotion Council.
“Banks might restrict finances only against direct bills with the new credit limit next financial year,” said a veteran in the sector, on condition of anonymity.