28 May 2020
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Credit Crunch in the Diamond Trade
By: Diamond World News Service
Jun 29 2019 11:53AM
Reference: 21316  

The last few years have been a trying time for the Indian diamond trade. Frequent reports of fraudulent incidents by diamantaires have left a bad mark on the industry and banks have lost trust in the trade. Extreme caution has led to extreme measures by banks and the ones suffering greatly are small and mid-scale dealers. Aroma Sah Anant speaks to bankers and industry insiders to understand what they expect from each other and what the future holds

It was around this time, a year ago, that an arrest warrant was issued against diamond trader Nirav Modi. Punjab National Bank (PNB), India’s second biggest staterun lender, accused fraud to the tunes of Rs 13,000 cr — it shook the nation, triggering a massive probe and came as a big blow to the multi- billion diamond industry in India. Soon enough, banks pulled back from financing the diamond trade and even asked traders to return 30 per cent of the money lent, a move that crushed the small and mid-scale diamond traders.

Similar to other trades, the diamond market has been dependent on financial support from banks, primarily Public Sector Banks, to procure raw materials, operate the working capital cycle efficiently and meet unexpected demands. However, in the wake of frauds and money laundering incidents involving diamond traders, banks revisited their credit policy which resulted in tightening of rules. Resultantly, collateral (in the form of cash and enforceable immovable property) have been raised considerably for poorly rated borrowers and new customers — a move that has greatly impacted mid and small-scale diamond dealers. From 15 to 20 per cent collateral, they are now being asked to shell out 25 to 50 per cent, over and above prime security. Vipul Shah, CEO and Managing Director, Asian Star says, “This is not practical. If the small lenders had that kind of collateral, why would they go to the banks in the first place?”

Nilesh Chhabria, COO, Finestar Jewellery & Diamond Pvt Ltd says, “Because of people like that of Nirav Modi, even companies that are producing the right balance sheets are getting affected in a major way. Banks are really scared right now. They are trying to keep their credit lines strong. My company is in the process of putting up factories in multiple locations, so we need funding. But public banks are not giving loans. Banks are stricter and the scrutiny faced by our industry is much more than any other.”

Diamond traders and industry insiders agree that the banking sector has lost their trust in the industry. Shah adds, “Big banks such as ADB and Standard Chartered have stopped the funding.”

A Chief Manager at the Indian Overseas Banks in Ahmedabad, who spoke to us on condition of anonymity says, “When incidents like Nirav Modi and Mehul Choksi occur, all the big fish escape. The first accountability falls on the head of the banker who had cleared the loan. On a personal level, my career suffers. So, yes, I find myself insecure, which makes me extremely cautious when the borrower is a diamond dealer.”

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