ARE WE READY FOR A CHANGE? Diamond Financing: New Realities, New Opportunities

Financing is a major trouble for the diamond industry. The Banking summit on diamond financing held in Mumbai helped the industry to know more about newer ways of financing as well as addressed the need for transparency and corporate governance. It also helped counter the negative perception that the Banking industry have of the diamond industry. Kavita Parab brings you a detailed report as it unfolded.
ARE WE READY FOR A CHANGE? Diamond Financing: New Realities, New Opportunities

In the wake of diamond financing becoming a challenge day-by-day, industry needs to find newer ways of funding the industry like P2P (peer-to-peer financing).

But before the industry embarks on a journey to find new financing options, it needs to embrace to two important factors - Compliance and Transparency - in the way it operates. Both being critical issues and absence of which has led to the Banks moving out of diamond industry financing or restricting their exposure to the industry.

So are we ready for change? Are we ready to give up age-old ways of business and bring in Corporatisation and Professionalism in the sector? The industry has no other way but to embrace acute transparency and corporate governance in order to restore the bank’s faith in the industry.

As the international financing to the industry has reduced, the major part of the funds for the industry comes from Indian banks. However, they have tightened lending norms and made funding difficult.

However, major onus of getting the funds still lies with the industry as it is up to them as how they restore lost faith and reinstate the credibility of the industry as a whole. Also, the industry needs to be forthcoming in regards to taking action against miscreants especially ‘willful defaulters’. In this, the GJEPC, BDB and MDMA can play a larger role. The GJEPC has already mooted ‘MyKYC’ which is an online networking platform for the diamond industry to improve transparency in transactions.

Apart from this, the banks need to have tailormade financing solutions especially designed forthe diamond industry.

This and many more issues related to diamond financing were discussed at a length during a special finance seminar - Diamond Financing Seminar: New Realities, New Opportunities - jointly organised by India’s Gem & Jewellery Export Promotion Council (GJEPC), the Bharat Diamond Bourse (BDB) and the World Federation of Diamond Bourses (WFDB), held as a special segment of the Presidents Meeting of the WFDB, in Mumbai.

Diamond Financing
Diamonds being high value products depend on financing, especially for the midstream (i.e. polishing) as rough diamonds are sold in cash while customer demand long (3-4 month) credit terms. Indian banks have supported the industry as it has grown to be a world leader in the midstream segment. However, banks have restrained themselves from lending to the gem and jewellery sector at a time when margins have reduced and prices have become more volatile. Internationally, few large banks are withdrawing from the industry while some others are withdrawing credit lines due to reasons unrelated to the diamond business or compliance or Basel II restrictions.

Inaugural Session
The dignitaries for the inaugural sessions of the third such financing seminar conducted by the GJEPC included Sudhir Mungantiwar (Hon. Finance Minister, Maharashtra State), Manoj Dwivedi (Jt. Secretary, Union Ministry of Commerce, Government of India), Praveenshankar Pandya (Chairman, GJEPC), Russell Mehta (Vice Chairman, GJEPC), P. S. Jaykumar (MD & CEO, Bank of Baroda), Karnam Sekar (Dy. MD & Chief Credit Officer, State Bank of India), Ernest Blom (WFDB President), Anoop Mehta (Chairperson, Bharat Diamond Bourse), Biju Patnaik (EVP, IndusInd Bank) and Ajesh Mehta Convener, Banking, Insurance, Addressing the inaugural session, Praveenshankar Pandya, Chairman, GJEPC, said, “The Indian diamond sector cuts and polishes a billion pieces and gets USD 6 bn from India and around USD 5.5 bn from international banking channels. The support of the banking & finance sector will be crucial for the future growth of the gem and jewellery sector.”

Pandya added, “To make the sector further organised, and to enable banks to get concrete information to do the right due diligence while sanctioning credits, GJEPC has intensified measures for corporatization of MSME units in diamond cutting and polishing. Bankers have a great opportunity to provide financing for the MSME sector, which constitutes one third of the total business thereby bringing them to the mainstream. One of the important steps taken by the GJEPC to further improve transparency in transactions in the sector is starting a KYC online networking platform for the diamond industry. The project helps its members and global participants to maintain their Know Your Customer information on a centralized web-based platform and share it with other members online through important gem & jewellery associations of the world. GJEPC seeks the Government support to move towards a European Union turnover tax type model for the trade. We also seek the formation of a Banking Committee that meets regularly, engages the trade and gives direction to the gems and jewellery sector.” Taxation Sub-Committee (BITC-GJEPC).

Manoj Dwivedi, Joint Secretary, Union Ministry for Commerce, said, “India’s gem and jewellery sector ranks very highly in terms of priority for the Indian Government as it generates exports, foreign exchange and employment for over 4.5 million people overall and 1 million in the diamond business. Over 60 per cent of the USD 40 bn exports in gem and jewellery in 2014-15 came only from diamonds. Export infrastructure has to be augmented and Union Finance Minister has announced that a new and restructured Central scheme, namely, Trade Infrastructure for Export Scheme (TIES) will be launched in 2017- 18. Government is open to GJEPC’s proposals on upgrading and globalizing technology and skilling India. Government has launched several new schemes such as Cluster facility, Tech-Upgradation Scheme and state-of-the-art infrastructure. New schools of excellence such as IIGJ Varanasi will seek to encourage local craftsmanship and enterprise. Banking sector has to create customized solutions for the gem and jewellery business in terms of standardized structures, new credit rating parameters, a modified modern relevant version of ECGC, guidelines for minimizing risk and stimulating growth amongst MSMEs. NPAs amongst MSMEs are generally low and banks have to offer sops to MSME sector. GJEPC has taken several initiatives and the MyKYC is an important step leveraging the power technology to empower the trade”

Presentations/Panel Discussions
The seminar featured a presentation from former Diamond Trading Company (DTC) CEO Varda Shine, who spoke about variety of future options including receivables securitisation, inventory securitisation, purchase credit, an increase in equity, peer-to-peer financing and fin-tech options like crowd funding.

This was followed by presentations by Walter Gontarek of Channel Capital Advisors on institutional investors, Paul Boots of Osprey Advisors on internet-enabled peer-to-peer and crowd funding. ABN Amro’s Head of Diamond & Jewellery Clients, Erik Jens, spoke about the nature of the financing challenges facing the diamond trade while George Abhraham from Emirates NBD explained about diamond financing scenario in the Middle East.

Anjan Ghosh of the Indian Credit Rating Agency (ICRA) talked about how the diamond industry was also viewed as a no-growth sector while IndusInd Bank Executive Vice President Biju Patnaik, pointed out that leaving secured creditors as the last to receive settlement while trade players with equity involved were bailed out first in the event of a bankruptcy did not induce confidence.

Besides, a panel discussion was conducted by Latha Venkatesh, Executive Editor CNBC-TV 18, which followed, with the participation of Pandya,Jaykumar, Karnam Sekar, who were joined by Biju Patnaik, EVP IndusInd Bank and Russell Mehta, Vice Chairman GJEPC, to discuss the various issues in an open and frank manner. There was a consensus amongst the panelists that there was a need for banks to do their due diligence carefully, understand the eco-system of the diamond industry and that the diamond trade should come forward to provide information inputs both, about the industry and the players within it.

The international session at the Diamond Financing Summit covered the changes affecting the financing available to the industry and alternates to bank financing, which can become potential means for new types of financing.

In India, the bigger issue is distribution of the finance even as MSMEs struggle to access finance as their sales are not exports but to larger domestic companies, who in turn consolidate and export diamonds. With demonetization, a larger number of smaller unorganized units are looking to enter the formal banking and financing channels. For larger companies, the question is more about the cost of finance, rather than their availability. Part of the problem relates to how banks and rating agencies approach the risk management for the industry. Most nationalised banks only lend against a full credit insurance cover, which of late is not forthcoming. The Seminar session catering to the domestic industry explored options as to how banks can work with the MSMEs in the sector to meet their requirements as well as examine how credit insurance and risk management mechanisms can be improved by the banks.

Let us know more about the Crowd Funding and Peer-to-peer Lending

Crowd Funding
‘Crowd Funding’ generally refers to a method of funding a project or venture through small amounts of money raised from a large number of people, typically through a portal acting as an intermediary. There are numerous forms of crowd funding: some are charitable donations that provide intangible benefits but no financial returns; others, such as equity crowd funding would fall within the domain of financial markets.

Peer-to-Peer or P2P Lending

P2P lending has lately gained momentum in India. During the seminar, how P2P can work for diamond industry was discussed at length. According to data released by P2PFA, the cumulative lending through P2P platforms globally, at the end of Q4 of 2015, has reached 4.4 billion GBP1. Lending through P2P has grown dramatically from 2.2 million GBP in 2012 to 4.4 billion GBP in 2015. Let us first find out what is P2P lending.

According to a Consultation Paper on Peer-To- Peer (P2P) Lending by Reserve Bank of India (RBI),P2P lending is a form of crowd-funding used to raise loans which are paid back with interest. It can be defined as the use of an online platform that matches lenders with borrowers in order to provide unsecured loans. The borrower can either be an individual or a legal person requiring a loan. The interest rate may be set by the platform or by mutual agreement between the borrower and the lender. Fees are paid to the platform by both the lender as well as the borrower.

The borrowers pay an origination fee (either a flat rate fee or as a percentage of the loan amount raised) according to their risk category. The lenders, depending on the terms of the platform, have to pay an administration fee and an additional fee if they choose to use any additional service (e.g. legal advice etc.), which the platform may provide. The platform provides the service of collecting loan repayments and doing preliminary assessment on the borrower’s creditworthiness. The fees go towards the cost of these services as well as the general business costs. The platforms do the credit scoring and make a profit from arrangement fees and not from the spread between lending and deposit rates as is the case with normal financial intermediation.

While crowd funding - equity, debt based and fund based- would fall under the purview of capital markets regulator (SEBI), P2P lending would fall within the domain of the Bank.

There is no credible data available regarding total lending through P2P platforms in India. However, the number of such Companies has been increasing significantly. According to newspaper reports, close to 20 new online P2P lending companies have been launched in the last one year. Presently, there are around 30 start-up P2P lending companies in India.

In India, the P2P lending is currently unregulated. However, the RBI is expected to come out with final guidelines on P2P lending soon.

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