Banking on trust

To an industry that was making all efforts to put a brave front in trying times, a small jolt might also prove to be harmful. While the solo incident of a renowned bank snapping its finance facilities to a big business house in Belgium, might be a slight tremor, but it definitely had a dominos effect that led various companies switch to alert mode. With a hugely positive 2013 ahead, companies were more focused to shape their business and pay attention to the market that is switching gears. In such time when the businesses are infused with positive energies after a long lull period, any big or small negative incident might have huge impact. This incident has been a learning incident for the diamond industrialists and the banks. It can also be said that many players in the industry are now examining other avenues to source finances. But many believe even before the incident happened, companies were exploring options and they would continue doing so in future. Preeti Srivastav talks to the industry insiders, who speak their minds about various apprehensions and probabilities in wake of such incident.
Banking on trust

Though it is said that diamond industry is a highly secure industry and is not too prone to losses, it is important to keep in mind a recent incident (of finance services to Arjav Diamond Unit being discontinued by ABN Amro Bank) which proves that it has its own insecurities too. To begin with was the damp business year that witnessed much turbulence in the prices (of both rough and polished diamonds), business, mining and almost every other aspect that forced the businesses to slip into retrospective mode. Next, while the industry pundits predicted a good year, the business houses shifted gears to match pace and make up for their ‘less profits’ by doing a heart-full of business. While market was inching towards positivity, an unfortunate incident in Belgium forced the diamantaires to take note of something that they have been not too worried about—their relationship with the banks.

While a few feel that it requires immediate attention and every business must take a second look on their relation with their banks to avoid any unfortunate events, many others think it’s just one incident and things have been fine otherwise and they cannot allow one odd incident to dampen their spirit.

While getting a clearer picture is difficult, the incident has definitely forced both the diamond industry and the banking sector to take note of it and do some introspection. While this does not, in any way, affect the dependency of both the entities on each other, however, it may possibly lead to some changes in policies, approach and relationship. For the thumb rule in diamond industry is ‘trust’, while banks are more professional and depend on deals signed in black and white.

Post the event, we tried talking to a few industry insiders and get their take on the big picture, and a unanimous opinion was that though the incident is an unfortunate one but given the rarity of the event, it cannot be expected from the business or banks to revise their policies and relationship. Diamantaires believe that it is a secure bond that has come of age after spending years working with each other and one odd incident cannot force the parties to take a second thought.

Sanjay Shah of Gold Star Diamonds has a different opinion than the majority. He stresses that the industry needs to mend its ways before banks get reluctant in investing in the diamond business.

“A reality check, introspection and confession by each company can prove that the industry is equally responsible for such an unfortunate happening that not only put one company or bank in a piquant situation, but also tarnishes the image of the diamond industry as a whole. Many new banks are trying to enter the market, which would open new options for the businesses and ease out the pressure on existing banks, but after the Belgium event, they are too cautious. The existing players are also worried about their money,” he states.

He further explains an important fact about the diamond industry. “It is vital to remember that we get loans at low interest rate, many business houses are procuring loan amount by showing fictitious turnover, which is not a difficult task given the product that we deal in. However, the loan procured is actually used in other businesses rather than diamonds. This is a huge concern for both the banks and the industry.”

Shah strongly feels that more stringent rules will not only ensure healthy diamond business but it would also check many malpractices and discrepancies that are happening. “In foreign nations, there are no duties imposed and the interest rates are lower than here, however, the rules are strong there and are able to ensure safety of their money,” he says.

The discussion drifted towards a subject that presented the larger picture of Indian Diamond industry, as Shah mentions about the difference in treatment of the money. “Twenty years back, bank loans were not so easy and available, still diamond business flourished. People not only invested their own money but also took care of every penny. Now there has been a huge shift in the attitude. Now that businesses have huge amount of money being offered by banks as loans, they no longer feel bothered and the seriousness that money deserves is not there. Now the risk has shifted to banks while it should be businessmen’s responsibility. This is evident from the fact that when companies were announced bankrupt, banks were the worst affected and the market was least affected. Many businesses at the verge of bankruptcy choose to settle market debts while paying least attention to the banks. The mentality behind this is that the businesses are able to earn market support while they keep banks hanging in the lurch and the delay in legal system in the country helps them do so. The severity of the situation is that they ‘may’ or ‘may not’ repay the banks.”

He also explains that many genuine and big companies in the industry still attach importance to money as they prefer investing their own money and avoid loans as much as possible.

Hinting towards huge discrepancy in the industry, he says that while the industry suffered and could show a maximum of four to five per cent of progress, there were companies that registered official growth of around 20 to 30 per cent. “Let us look at it from a layman’s point of view. Companies kept cribbing that there is no sale, which was true. However, at the same time, they kept taking huge loans from banks to keep their store full in hope of sale. Any industry must not use finance for growth unless retail is growing. India faced similar situation in 2008, when manufacturing boomed while retail remained low due to inflation, price rise of gold and diamonds and many such factors.”

Not only did he point out the problem, he also suggested that rather than procuring loans to fill stores without sale, diamond companies must look at promotion and advertising that would boost sale and help them in getting money and pay debt as soon as possible.

When asked if companies are looking at other finance option, Sanjay Shah raises another pertinent question that still remains unanswered. “Many diamond and jewellery companies are going public, thereby now looking at public money. This is a huge question mark, and may pose a threat if not handled well. Companies are already known for their lax attitude towards others’ money.”

Answering the question regarding stretching relation between banks and diamond companies, he says, “The relation are already not very promising. Many banks, based on their experience or market incidents by a few diamond companies, tag every company as ‘thieves’, which is an incorrect approach. Similarly companies also should not start doubting their banks unless there is some genuine reason. Such approach on part of banks or companies will ruin the relationship further.”

An optimistic Shah says that future can still be looked at under bright lights. “Banks must be careful as they invest and have sturdy rules. And companies must, first of all, be realistic. Accept the market conditions. Work like a commoner, who would have—paying off debts as his first priority. Companies should focus on increasing consumer base as that is the real criteria. Increased turnover is a farce, as value of rupee has depreciated and inflation has shot up, thus turnover figures are sure to soar, but without increasing consumer base it’s difficult to claim growth.”

Yet another stalwart from the industry, who is reckoned for his knowledge in finance, is Dinesh Lakhani of Kiran Gems.

Lakhani looks at the event with a very practical approach. He points out that the incident has definitely forced the banks to be more alert but this is no bad news for the industry. “Banks are apprehensive about anything that might make finances go wrong and therefore they are being extra cautious. However, this is a blessing in disguise for the industry as easy availability of financing may lead to improper use of the same.”

Talking about the steps planned by the companies in wake of the incident, he says, “Every market participant must ensure that they do everything to maintain the integrity of the industry. This will bring in more confidence to all, the bankers and the companies that operate in the industry, both in present and in future.”

When asked about probability of banks opting for more stringent rules, he reiterates his practical response and says, “If the banks are inclined to impose more stringent rules, then they must be having a reason behind this. In order to grow and expand, the companies need finance and banks want to finance deserving companies that want to grow and expand. It is a win-win situation for both. So, as long as it is fine between the parties, rules cannot be a problem.” Lakhani also pointed out that companies with sound business policies and systems might not need to look at alternative finance sources, while others may explore. However, talking about the impact of special rules or alternative finance sources option depends on the relationship between companies and banks, he says, “It is not expected that these factors should hamper relation. Banks also want to establish cordial business relations with the various industries. If they make policies and procedures that keep the companies at bay, they too will end up losing healthy business. Nobody likes to lose business.”

“In future, the relationship between the financer and companies should be shaping up in such a fashion that it should complement each others’ needs. Banks need sound companies committed to growth and performance, while companies need finance to propel its growth,” he concludes. Throwing light on the prevalent ideas and current state of diamond industry, Vasant Mehta, former Chairman of gem and Jewellery Export Promotion Council (GJEPC), says, “Banks make most of their profit through the interest earned from loans or advances given to exporters. Talking about diamond industry, it’s a unique industry but it is not difficult to understand how it functions. And those financial institutes who have studied the industry well have been successful in their dealings. Due to some of its functions, the industry has also attracted ‘fly by night’ outsiders, who have hurt the credibility of this industry. Historically, the NPA in this industry is the lowest and in the last seven decades banks have made good money and at the same time helped this industry to achieve the prime position today. Having said that, the times are now changing and with it the attitude has changed.”

“The Indian system of bank finance is one of the safest compared to that in other centres. Most of it is offered as post shipment. There is a short time limit for pre-shipment facility, wherein the borrower is expected to offer export bills within 90 days. I strongly feel that those banks that examine and monitor accounts (clients) have no need to worry. Details of exports/sales of each borrower are available to the banks on a regular basis and all they need is to analyse those and control their outflows. On an average the funds are advanced for four to six months and this makes it easier for the banks to control the account. It is only a question of due diligence, which is sometimes ignored and is the sole reason of losses in a regular manufacturer/exporter firm,” he adds.

Keeping the incident in mind, we asked him if the industry is getting apprehensive about finance facilities or not, to which he replies, “Like in any other industry, there are problems being faced by diamond industry too. We are faced with minimum/nil profit margins and less consumer demands. Manufacturing is at its lowest levels. On the other hand there is huge speculation in rough prices by a few financially strong companies. The question that hovers on everyone’s mind including the bankers, is—how long will this continue?
Though the industry would need continued bank finance to tide over this situation, it is now expected that banks would be a little more cautious in their approach.”

While he mentioned that the banks should be more careful, he also says that diamond companies need not be too worried and need not bring change in their working. “Every downtrend is a learning experience for diamond companies. Most of the companies are decades old and have matured considerably. These industries are on a strong footing and sustainability is guaranteed. So, they should rather focus on maximising their profit, product improvement and marketing which would, in turn, enable them to prevent any such unwanted or unwarranted situation.”

When probed a little more about any kind of change in the banks’ approach and attitude, Mehta says, “Most of the banks that have been financing this industry from the 1970’s have an extensive knowledge of how the industry works. Accordingly they have set good loan rules to protect their funds. However, new banks need to take a lesson from them and finance accordingly so that no unpleasant situation arises. As far as stringent rules are concerned, it will only discourage good and sound companies and attract weaker ones thereby not proving very good for those banks either.”

Mehta did not rule out the possibility that the industry might also look at other alternatives of finances. “Whether the incident is referred or not, many players in the industry are now examining other avenues to source finances.”

We asked if this would cause discomfort top banks and affect the relationship between companies and banks, to which he says, “It is a professional decision. In fact, banks should rather be happy that their burden is reduced and at that the client's credibility is good enough to source funds from outside.”

However Mehta warns against hasty decisions and suggests, “Let’s not forget that the industry is going through a tough period. If there is a panic, there are bound to be losses. Bank finance is like an umbrella that is most needed during rainy days. Hasty decisions would lead to losses and would discourage banks to finance in future.”

Sharing some insight on the same, we had Vipul Shah, Chairman GJEPC, who not only highlighted the trend and industry’s mind at present, but also had a clear picture of future.

Taking a neutral stand on the issue and highlighting the relation between the banks and diamond industry, Shah says, “In our opinion at present, the finances provided by the financial institutions, which is to the tune of USD 6 billion is on the higher side. However the diamond Industry is one of the most secure industries in terms of financing as banks have witnessed very few NPAs in the last four decades. Industry has shared a very healthy relationship with the banking institutions over the time. In our opinion, the financial institutions should regularly monitor the accounts of their clients to see that the money advanced is being utilised for operations in diamond business only. Post global financial turmoil in 2008, the bankers need to take a much more careful approach for all industries and diamond industry is no exception.”

When asked if diamond companies are mulling over the idea of taking steps to avoid such unfortunate circumstances, Shah says, “In any business, including diamonds, no company would like to lose its money. If anything goes wrong, it is expected from any company to take stock of the situation, find out what has gone wrong and take measures to fix it and also to avoid unpleasant situation in future. However different companies have different working styles and hence what is applicable for one company may not be true for the other.”

In an honest attempt to suggest measures to avoid NPAs to banks, Shah says, “Diamond is a unique industry with intrinsic trade characteristics. It simply cannot be equated with other sectors in the country. The financial institutions need to understand the micro and macro dynamics of this industry. Banks have to keep their ear on the ground to always be in tow with the changes that take place in running a business and the conditions that are prevailing. Based on their reading, the banks need to take adequate safeguards wherever necessary.”

Shah rules out the probability of businesses looking at other finance options, as he says, “As I have already mentioned that bank finance to the diamond industry is already on the higher side. So I do not think that companies need to look at any alternative source of finance right at this moment.”

Talking about the incident having any impact on the relationship between the banks and the industry and how the relationship will grow in future, he says, “Banks are all-weather friends for this industry and are an ideal partner. Stray incidents cannot affect strong relationship that is built over four decades. Banks have played an extremely significant role in the phenomenal growth of Indian diamond industry. The diamond companies consider banks as their partners and will continue to do the same in future. We do not foresee any strains in this strong relationship between both of them.”

As the sparkling diamond industry is not confined to any political boundary and goes beyond countries and regions. We contacted Earnest Blom, President, World Federation of Diamond Bourses (WFDB). Blom had valuable inputs to share and when asked about the uneasiness among the bankers and companies, he says, “By and large there exists a very cordial and mutually respectful relationship between the banks and their customers, the diamantaires. In terms of apprehension there does not seem to be any existing. Safe to say that there will always be some customers who will default on payments, as happens in any business, and banks call up loans in the normal course of events.”

Blom points out that the respect towards the other is not one-sided and both the banks and the companies value each other. “I believe most companies value and respect the relationship they have with their bankers and adhere to the terms and conditions of their facility. Again, there will be a company that will default, which happens with all banks and various industries. Diamond industry is not unique.”

Considering the recent happening, Blom says that all banks always re-assess their lending conditions and this would continue even though there are a few defaulters.

When asked if the incident would make companies to look at alternative finance options, he says, “Any company or business should look at all avenues of alternative financing, which is a prudent business strategy. However, one incident cannot be held responsible for this. Even before the incident happened, companies were exploring options and they would continue doing so in future.”

Again, refuting the possibility of any negative effect on the relationship, Blom says that one stray incident would not hamper the relationships between the banks and the diamond trade. It would continue on the same cordial grounds as before. “It is imperative that the dialogue between industry and the banks remain as robust as before. It is important that we continue to talk to each other for our common future,” he concludes.

With such inputs that speak for both the industry and banks, and gives suggestions for a better future, it is now to be seen how and what the diamond trade and banks learn from the events and how they shape up their future plans and policies.

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