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Bank Loan Becomes the Back-bone of the Diamond Sector...
By: Manjari Sabharwal
Oct 24 2006 12:00AM
Reference: 2145  


Bank Loan Becomes the Back-bone of the Diamond Sector

Success of any businessman depends on his foresightedness to take calculated risks, to have enough funds to act as shock-absorber in times of unforeseen losses and to cut on costs with bulk purchases. In order to meet the above mentioned benchmarks a prudent businessman must allocate enough funds which are a vital lubricant to run business.

When every small and big business needs investment of funds in the initial phase how can the multi-billion diamond industry be an exception to the rule? With three fourth of diamonds cut and polished in India being exported, financial support is one factor this business cannot do without.

Sources of Finance:

Interestingly this industry is one very closely knit and businessmen being men of words, finance worth crores can even be availed internally by word of mouth, besides the usual procedure of procuring it from banks and various financial institutions and private sources.

Govind Kakaria, of Sheetal Group, popularly known as Govind bhai in the industry puts it aptly, “If the businessman is a ‘man of words’ and has good creditworthiness, he can also borrow from traders themselves. The best part about this industry is that most of the people keep their words. Money lending of crores takes place without any documentation!”

Banks at Your Service:

Major cooperation of banks to the diamond industry dates back to 1980s. ABN Amro, being the Big Boss, there are nearly 50 banks in India including Public Sector Banks (PSBs), Cooperative Banks, Private and Foreign Banks that help the diamantaires in times of need. To name some of these - Allahabad Bank Diamond Branch (Foreign Exchange), American Express Bank Ltd, Andhra Bank, ANZ Grindlays Bank, Bank of Baroda, Bank of India, Bulls & Bears Finance Limited, Corporation Bank, Global Trust Bank, Indusland Bank Ltd, KBC Bank NV, Punjab & Sind Bank, Punjab National Bank, Saraswat Coop. Bank, State Bank of India, The Sakura Bank Ltd, The Vysya Bank Ltd and Union Bank of India.

Hard-earned Name & Fame:

Traditionally, after ABN Amro, SBI ranks second when it comes to financing diamond trade the third being Bank of India. (the ranking is based on the ratings periodically conducted by various financial institutions). For rankings refer to ranking chart of banks in India on the basis of advances made by them.

New Players on the Court!

With Mumbai and Surat being the hubs for diamond trading, a number of PSB’s and private banks are jumping into diamond financing. According to market sources ICICI is a new player with approximately 900 crore of financing to diamond business. Also Kotak Mahindra was planning something for diamond industry.

K B Rajgopalan, Dy General Manager, SBI, sales hub, Diamond Branch, says, “Recently a number of banks are coming up in diamond financing. New ones being ICICI, which has come in on a very large scale, also Kotak Mahindra was planning for diamond financing.”

Need for Finance:

Like some other trades, finance plays a very critical role in the business cycle of the diamond industry also.

Sevantibhai Shah Founder Chairman of Venus Jewel says, “Various factors affecting the finance in a business are Credit periods, Floating charge by banks, Concentration on few buyers and Long Term Credit from supplier.”

Further he observes, “The diamond industry is highly working capital centric where most of the business investment is held in the inventories and receivables, while in most cases, the same get funded through huge bank facilities as well as credits extended from the trade. Working capital plays a critical role in a business with a low production cycle like diamond.” Success in such working capital-centric business comes from:

  • The ability to operate the working capital cycle efficiently.
  • Sourcing working capital requirements (inventories and debtors) from as far as possible through own capital, thereby de-risking the business.
  • Maximizing returns on capital employed.

In the last few years, diamond manufacturing has witnessed an enormous change where new and expensive production technologies have been adopted by various diamond-manufacturing units resulting in substantial capital outlay. It is important that appropriate leverage is maintained in the business during such transition.

Extension of large credit to the debtors and from the supplliers is one of the biggest hindrances in blocking of finances as well as inventories at various distribution levels, ultimately resulting in stagnation or slow movement of funds.

Hence, the overall financial cycle should be smooth and uninterrupted.

Types of Finance:

Since most of the diamonds processed in India are exported, traders mostly require loan for financing their export demands.

Broadly there are two types of loans provided by the banks- Pre shipment finance also known as Packing Loan and Post shipment finance. Pre shipment finance is taken to procure raw materials. Post shipment finance is taken after the cutting and polishing when the goods are ready for export. Also certain banks provide loans on Adhoc basis. During any financial year if the trader receives an order for which he had not made any provision earlier, banks provide loans to meet such unexpected demand.

P. C. Sharma, Chief Manager, Allahabad Bank, Diamond Branch, says, “At times traders receive orders suddenly for which they had not made provision earlier. We grant them loan for the purpose.”

Finance for Local Trading swelling up…

With demand from USA which amount to 60 per cent of India’s total diamond exports shrinking to some extent, jewellers are shifting to branded jewellery in a large way. Thereby there has been a shift in demand only for financing exports to financing internal trade too. Also with gen-y having financial independence from a young age demand for branded jewellery has gone up.

M. A. Tayshete, Asstt. General Manager, The Saraswat Co-operative Bank Ltd says, “We are observing a change in the requirements of loans from diamond traders. Of late there have been a number of queries regarding local finance.”

Expressing similar viewes, P C Sharma, Allahabad Bank, says, “Need for finance in huge sums for diamond industry was felt when exports increased. But looks like very soon finance for internal trade will shoot up quite a lot, the reason being that local demand for jewellery is increasing amongst youngsters in a big way.”

A MUST HAVE for Loans:

Well there are banks which cater only to DTC Sightholders while there are others who provide to medium or even small traders. But one thing which is common- prior to lending to any diamond trader verification of his creditworthiness.

Mandatory Requirements of Banks:

Three years Balance Sheet, Three years annual reports, Details of promoters, Information of all the Directors/Partners, Income Tax data of Directors, History of the organization and Market information about the client.

Besides these, each bank has its own policy of giving finance. For instance SBI takes into account, ‘Capital of the person, capital to outside loans percentage, money he is putting in working capital, his own funds should be 25 per cent of the funds he has put into trade, the inventory levels, receivable levels and monthly sales as stated by Rajagopalan, Dy GM, Diamond Branch.

Interest Rates on Diamond Financing:

Just like any commercial financing, interest rates on the finance for diamond trading depend broadly on the credit duration, soundness of the businessman and government policies.

Although financing for exports is cheaper in comparison to finance for local trade. Interest rates for export finance range from 7, 7.25, 7.5, 8, 8.5 percent per year depending on the bank. But the interest rate for exports charged by a particular bank from diamond traders remains same for all its customers. Not only is local finance costlier but it also varies from one client to another depending on his creditworthiness in the market.

In certain cases traders take finance in Dollars, which is available at London Inter Bank Office Rate LIBR plus one per cent. The current rate of LIBR is approximately 5.4 per cent. So finance in Dollar would be available at 6-4 per cent (LIBR plus one per cent).

K B Rajagopalan, Dy GM, SBI says, “Around two years back LIBR was at 1-1.5 per cent which made loan available at less than even 3 per cent (1.5 plus one per cent). But now things are very different. With LIBR at 5.4 getting loan in Rupee or Dollar terms is almost the same. This also explains the tough time these diamond traders are going through in terms of finance.”

Trust all the way:

It should be mentioned here that the diamond industry has passed over its legacy of maintaing trust and trend of believing on people to these banks. What when there is no system of giving finance after official grading and certification of diamonds ?

K B Rajgopalan, “We do not look at diamond financing as a commodity loan, rather we see to it as industry loan. Actually India specializes in small size diamonds and it is practically not possible to evaluate each and every stone also it is very expensive.”

S. R. Chorghe, Senior Manager, Saraswat Co-operative Bank Ltd says, “We have no option other than believing them and they are really a trustworthy lot.”

Banks Conscious about Surat Floods:

Diamond traders feel that Surat floods have been really instrumental in bringing down production to cope up with high price of rough.

Govind Kakadia, says, “It would have been really difficult to convince all traders to reduce buying rough in order to bring its price down but floods automatically regulated the polished production. Traders will feel the advantage in the long run when rough prices will be lowered.”

Navin Mehta, Partner, D Navinchandra and Company, President, Mumbai Diamond Merchant’s Association says, “Now the banks have also become very conscious. They think twice before lending money only because of the fact that they lend money only to such clients that do good business in the wake of rising rough prices and low margins Banks have become very choosy in giving loans to traders.”

Government Regulations:

As far as financing diamond industry is concerned all the banks function on their own rules and regulations while respecting the RBI norms. RBI has notified that banks cannot lend more than 15 per cent of their total lending limit to one particular industry.

Bad Debts Negligible:

One thing which has become an established fact is that people in the diamond industry are trustworthy. This is proved by the negligible amount of bad debts these banks have on hand. Rajgopalan, says, “bad debts as a percentage of total advances will be less than 5 per cent.”

In order to safeguard themselves against any bad debts banks have taken cover from Export Credit Guarantee Corporation, which is a subsidiary of Reserve Bank of India.

Gold Card Holders - A Privileged Lot!

RBI offers Gold Card to diamond traders which makes them eligible to receive various concessions while procuring finance.

The criteria for becoming a Gold Card holder are:

  • A customer should be in this business for more than three years.
  • It should be a profit earning company.
  • Customer’s Credit Risk Grading should be within AB 1-4 and not AB5,6,7,8.

Finance Demand Boosts for Festive Season:

Banks are expecting good demand since the festive season in India has kicked off. P C Sharma of Allahabad bank says. “Christmas demand is there and traders require finance. We have started getting demands. This month finance is expected to rise overall by 20 per cent in the industry.

Venus Jewel:

Sevantibhai Shah (Founder Chairman of Venus Jewel) “In India, interest rates mainly vary from 7% p.a. to 12% p.a. for extension of credit to the business depending upon the creditworthiness of the loanee.

Depending upon the position of supplier vis-à-vis buyer, the credit period in the diamond industry varies from 0 days to 180 days. Bank is the major source for finance. Finance is available against Partners’ own assets, Personal guarantee, Fixed assets of the firm, Stock Fixed deposit and Receivables.”

He adds, “Boom or burst, procurement of finance has largely dependend upon the capital gearing. For existing diamantaires, who already enjoy large bank facilities, it is difficult to augment further, if there is a positive growth. Banks should also monitor proper and efficient utilization of funds.”

Rajiv Mehta (CEO, Dimexon Diamonds Ltd.)
“As in any business, finance is the corner stone of any venture for obvious reasons. However, in the case of the diamond industry, the importance of finance is multi-fold as it is a highly capital intensive business. The current interest rates range from 7-8% if the borrowing is based on dollar terms to +10% if it is based on rupee terms. The terms of credit are generally in the range of 150 days average for a polished manufacturer. This may deviate based on the business and more importantly, the business model followed by individual firms.

A Bank will give funds to any establishment based on sound business practices and a business plan which will be evaluated. If the plan does not demonstrate a strong business model, then banks or any financial institution will refrain from extending credit to such individuals/companies. To further evaluate the financing of the Diamond Dollar Account (DDA) by the established banks which will ease business transactions on a B2B level in the market.”

Rakesh Gandhi of Navin Gems
“Market runs only with the help of finance. Presently we are procuring finance at 9 per cent for a period of credit period is 4 to 5 months.”
Tulsi Bhai of Hari Krishna Export
“Finance is very essential for diamond business. At the moment we are procuring loans at around 8.5 per cent normally for 4 months period. There have been no problems as such in dealing with banks.”

Govind Kakadia, Sheetal Group
“Finance is the backbone of this industry since we give a lot of credit period to our buyers. Since there are a number of players in the industry we need to go by the industry norms. Dealing with banks was a little problematic earlier as people were not very educated. But over the years procuring loans from banks has become very easy. A lot of credit goes to GJEPC which has made banks understand our requirements.”


K B Rajgopalan, Dy GM, State Bank of India
“SBI is pioneer in diamond financing. We have been in this industry since 1971. For the past five years a number of public sector and private banks have been coming up in a big way.

Our growth rate in past three years has been approximately 90 per cent. It was a conscious effort from our side to capture major market share. Being closely associated with people in this industry I am having a feeling that there could be some problem in meeting demands post Surat floods. Damage to machinery is low as compared to production loss since workers fled to their native places. The damage these floods caused would be recovered by January next year but presently industry is going through a major cash crunch. This is due to the high price of rough coupled with decrease in demand by US.”

M. A. Tayshete, Assistant GM, Saraswat Co-operative Bank Ltd
“Saraswat Bank has been diamond financing since 1984. We began with a humble amount of Rs. 50 lakhs and at the moment we have Rs. 125 crore business with approximately 150 clients. We extend loans to medium, big and small exporters. We are receiving queries from traders to finance local trade. Looks like local diamond financing will grow up swiftly in the near future.”

P. C. Sharma, Chief Manager, Allahabad Bank
“Allahabad Bank has been diamond financing since 1986. We had started with Diamond financing only but gradually we started financing other export import business, so ours became a Foreign Exchange Branch. But our major chunk of business, is still diamond lending. At the moment we are doing around 300 crore business with 10 DTC, 25 non DTC customers Gitanjali Gems which pioneered branded jewellery in India is one of our clients. India is an emerging market since there is a lot of demand for branded jewellery amongst new generation.”

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