Fearing defaults, banks rein in credit to jewellers
NEW DELHI/SINGAPORE: Indian jewellery firms are finding it increasingly hard to get credit to import raw material and ship out their wares as banks tighten the screws, worried about defaults and sharp practices in the sector.
The problem has become so acute that jewellery industry executives are sitting down for talks next Tuesday with Finance Ministry officials, said Bachhraj Bamalwa, director of the All-India Gem and Jewellery Trade Federation.
“Banks have classified gems and jewellery into the high-risk category,” he said, adding the industry was already paying higher interest rates than other sectors.
Tight credit in the capital-intensive industry could hurt shipments from India, one of the world’s top jewellery exporters, possibly pushing up the trade deficit and undermining the rupee.
Gems and jewellery account for about 15% of India’s exports. Among the biggest jewellery exporters are Gitanjali Gems Ltd, Rajesh Exports and Asian Star.
The banks were shocked by a huge default by Winsome Diamonds and Jewellery in 2013. Indian media reported the firm, with affiliate Forever Precious Diamond and Jewellery, defaulted on some 60 billion rupees ($970 million) owed to creditors.
“Generally the banking sector is going very selectively on gems and jewellery. Winsome and Forever had beaten us badly,” said the head of a state-run bank, asking not to be named.
It was unclear how bankers were deciding which jewellers to support.
Standard Chartered, State Bank of India (SBI), IDBI Bank Ltd and ABN Amro among others have become very cautious about their exposure to the industry, bankers and market sources said.
“The lack of credit in the industry is definitely a problem. Standard Chartered recently denied me a loan,” said Prasoon Dewan, chief executive of Eurostar EXIM Pvt Ltd, an exporter of diamonds and precious metals.
Standard Chartered had said the firm did not meet its guidelines and it viewed the entire jewellery sector as negative, Dewan said, adding that SBI was also cautious.
Standard Chartered said in an e-mailed statement that it was not exiting the diamond and jewellery business but reviewed its client portfolio all the time to manage risk proactively.
Dutch lender ABN Amro took a similar line in an e-mailed comment on its global policy. “ABN Amro did not pull back but reassessed its portfolio, which is not uncommon (over) the last few years in the banking sector.”
A general retreat is clear, however: lending by commercial banks to the jewellery and gems sector in the 12 months to September 2014 grew just 1.2%, compared with 10.2% in other industries, Financial Services Secretary Hasmukh Adhia told an industry conference last month.
“One big concern for the lenders is ‘round-tripping’,” exporters and other market sources said.
Some jewellery firms ship the same stock back and forth several times to inflate their export figures, which allows them to seek bigger loans than they need so they can route some of the money to other, riskier investments, mostly in real estate.
Because of a slowdown in the property market, these companies are finding it harder to repay such loans.
“The banks don’t want to burn their fingers, so they are tightening the screws,” said an exporter, who spoke on condition of anonymity.