Lacklustre Days Are Here Again…

… or are they? Despite some instances of diamond traders defaulting on their payments to financial institutions, most people in the industry feel that this is just a flash in the pan and not the start of a trend, reports Vinita Bhatia.

The diamond industry has been on a rollercoaster ride since 2008, which was when the financial crisis hit globally. According to ‘The Global Diamond Report 2013: Journey through the Value Chain’ report by Bain & Company in association with the Antwerp World Diamond Centre (AWDC), the global retail sales of diamond jewellery grew 1.8 per cent from 2011 through 2012 to $72.1 billion andthe market showed signs of improvement in the first half of 2013.

However,not many are willing to pop the champagne to celebrate. As per GJEPC statistics, the total gems and jewellery export in 2012-13 decreased by almost 10 percent and polished diamond export by 25 percent. Against the export of $23 billion worth of polished diamonds in 2011-12, India exported $17 billion worth of diamonds in 2012-13. This contraction of the Indian diamond cutting-and-polishing market was compounded by a slowdown in domestic demand and devaluation of the rupee. In addition, India’s parliament imposed a new two per cent duty on polished-diamond imports.

Talking about how this duty will affect the imports, Manish Kandelof Neelam Jewels said that diamond companies now import polished diamonds directly, rather than sending rough diamonds to India to be polished. This is killing the local diamond polishing business, and many of these companies are shutting operations.

It was around this time that news of payment defaults by diamond traders started trickling in. But what really made everyone sit up and pay attention to the trying conditions in the industry was when some private and public sector financial institutions, including Punjab National Bank and Central Bank of India, initiated legal proceedings against Winsome Diamonds and its sister concern, Forever Precious Jewellery, to recover loans. One report states Winsome Diamonds currently has bad loans of Rs 3,800 crore, while Forever Precious Jewellery has defaulted to almost Rs 1,700 crore.

In good health and bad
Indian Jeweler spoke to some traders about the legal notice served to Winsome Diamonds, but most professed ignorance about the case or chose not to discuss it. JagatThakker of Hari Krishna Exportsstated that though there were some instances of failures in the past, he was unaware of any major cases of dishonesty (read default) stunning the trade.SurajPopley,Managing Director of Popley Eternal further explained that the diamond industry tends to be extremely conservative and stable, where a handful of players dominate the rough diamond production. “Because the industry is so bound by tradition, any disruption in the pipeline tends to spark concerns,” he surmised about the doubts that diamond traders are unreliable debtors.

Even SurajShanthakumar, Director - Business Strategy, Kiritlalsdismissed the doubts surrounding credibility of diamond traders. “I don’t there is an ongoing crisis where companies are defaulting on payments on a large scale. In any market, there is a cycle when things get tough before they look up. The last quarter of 2013 was dull, but is likely to pick up soon,” he added.

Retailer BhavikJhakiaof Om Jewelers has noticed that the demand is going through a switchover phase as public aspiration is shifting from gold to diamond jewelry, which is a fortunate occurrence for the industry. “The consumption for diamonds in India is strong, but the presence of too many players resulted in the supply outstripping the demand,” added PareshManiar of Pure Jewels. However, despite the growing competition he too does not believe that the fiscal health of the industry is fragile.

Credit crunch crunching the trade?
Credit is the lifeline of any business, especially when companies want to go into expansion mode. The first door they usually knock on for credit is that of private and public sector banks. However, it is reported that banks have become more cautious about lending finance to gems and jewellery companiesfollowing reports of default in payments.

Says one banking official on conditions of anonymity, “There has been an increase in the number of willful defaulters in the gems and jewellery trade, where the company has the assets to repay the loan but is unwilling to. Private banks have almost 2 per cent of bad loans in this segment, while the percentage would be double in the case of public sector banks.”

Industry people would still prefer to brush off these bad loans as one-off instances rather than label it a growing norm. Established players go for a stable expansion approachand plan their financials accordingly because they are in for the longer run.“It is important to understandand then reactto economic situations; besides understanding the kind of consumers one is dealing with. A smart entrepreneur comprehends all aspects of consumer spending and then plans accordingly to keep his business on track,” Chandresh Zaveri, Director, Zaveri& Coadded, which means that his chances defaulting on payments are unlikely.

Manish Javeri, Head of Financial Services at The Financial Boutique said that banks now do better due diligence before furnishing loans to gems and jewelry companies. At the same time, he pointed out that they are more willing to offer loans to the diamond companies as compared to those trading in bullion. “The diamond industry is faring better than gold. Financial institutions find it safer to lend to diamond traders, especially those who are in the domestic retail segment. This is because they sell to end-customers who pay in cash and hence have better liquidity,” he added.

Financing diamond exporters is a different matter altogether because their customers are based overseas and often remain unidentified. A banking official revealed that banks that extend loans to such players are now demanding higher collateral from the debtors. Paresh highlighted another point here. “Irrespective of the industry, ultimately banks will extend finance to companies based on the health of their balance sheets for the past few years. If a company has stable assets and has been posting CAGR growth at par with the industry, then financial institutions would not mind backing it,” he asserted.

Ram Raimalani MD, MK Sons Diamonds agreed with this conjecture noting that diamonds are good assets to liquidate in case a bank has to foreclose a loan extended to a defaulter. “Unlike other industries there are no dead stocks in the case of the diamond trade as the stones can be sold easily to recover the funds,” he added.

According to another banking professional, the issue arises when a defaulter is a ‘willful’ one; who will challenge the bank’s decision in court and tie up the cases legally for many months. This is where the stringent due diligence norms come into play.

Alternative sources for raising finance
While banks remain the first, and the best, choice for raising funds, some diamond traders are willing to explore other avenues. SurajShantakumar talked about some non-banking financing institutions (NBFI) that will bankroll a diamond trader’s business. The advantage of these NBFI is that they sanction loans faster than traditional banking institutions, but they also charge higher interest rates. Typically, a bank will charge around 16 percent interest, while the NBFI charge around 18 to 19 percent interest. “This is the last resort for most traders, because with rising costs and growing competition, it is difficult to get hold of good margins to keep the business healthy. If one has a loan with heavy interest rates to pay off, then it compounds matters,” he added.

Paresh also mentioned that there were people who will pay for the expensive equipment, instead of extending finance, for diamond traders who want to expand their business. “But this is ideal for small traders who are setting up fresh operations rather than for existing players,” he added.

All people we spoke to, however, agree that the ideal source of finance remains internal accrual. Internally generated revenue takes time to amass. This can be done by keeping investing in technology to improve efficacy, securing better credit terms from suppliers, monitoring cash flow andkeeping costs as low as possible. Like SaurabhGadgil of PN GadgilJewellers pointed out, the diamond industry is in the cusp of big changes and bigger challenges. With some prudent planning, all players in the trade can improve their credibility and grow their business.