CAPITAL INJECTION

A clutch of cash-rich business conglomerates, well-funded first-generation jewellers—newly founded and rising start-up brands and high-performing listed jewellery companies are infusing massive capital into markets. This is increasing their market share and registering steeper growth curves every passing decade. The landscape of change in the industry is unprecedented.

On the other hand, most family jewellers adhere to a more conservative approach, investing ‘family money’—typically generated from the family’s jewellery business—to fuel their growth. They view borrowing money as a sign of financial weakness and, in some cases, as a potential threat to the family’s reputation. The prevailing market forces raise pertinent questions. Is it still judicious to settle for leisurely self-funded expansion, or is it wise to take giant leaps with external funding? As the industry catapults from $70 billion in 2022 to $145 billion by 2030, should the cost of capital be measured by the interest cost, equity dilution, or the potential for missed growth opportunities?

India’s epic journey from a developing to a developed nation presents businesses with a once-in-a-lifetime opportunity. Is it time for family jewellers to make
bold moves and raise the game?

The Aditya Birla Group, a prominent player in the Indian business landscape, made a strategic move in June 2023 by venturing into the branded jewellery retail business. This bold step was backed by a substantial investment of Rs. 5,000 crore, signalling their strong commitment to this new sector. Their stated intention is to be ‘big in the lives’ of consumers and transform how India purchases fashionable (precious) jewellery. The Birla Group plans to build large-format exclusive retail stores nationwide, selling bespoke, design-led, and high-quality jewellery.

With a well-crafted strategy and carefully chosen brand name, Novel Jewels is more than just a name for the Aditya Birla Group’s new venture. It promises something fresh and innovative in the world of jewellery and is a straightforward way to communicate the brand’s unique selling proposition to consumers. This is bound to create a challenging retail environment as the segment has also been the mainstay of legacy jewellers, signifying their strength with creative, unusual, and distinguished jewellery.

Industry insiders anticipate a significant expansion in the Indian jewellery market. They predict that national, regional, and local players will open at least 3,000 new stores in the next two years. The organised sector, which constituted a mere 5 per cent of the jewellery market in 2005, is projected to increase to an impressive 40 per cent by 2030. This growth trajectory is expected to catapult the industry’s value from $70 billion in 2022 to $145 billion by 2030.

Interestingly, the quantum of gold imports has not increased in tandem with the organised sector’s growth, suggesting a consolidation in the market and a rapid shift in consumer preferences. The trend indicates their growing spending power and the changing dynamics in the jewellery retail market.

The wealth of affluent Indians is rapidly growing. Rising income levels and urbanisation create a unique dynamic for the industry. India’s journey from a developing to a developed nation presents businesses with a once-in-a-lifetime opportunity. Aditya Birla group chairman Kumar Mangalam Birla has astutely observed that the industry presents a unique opportunity to capitalise on.

According to Deloitte analysis (presented at the 10th Retail Jeweller India Forum 2024), FDI inflows into the gems and jewellery sector totalled $1.2 billion between April 2020 and March 2022. Against the backdrop of these developments, the All India Gem and Jewellery Domestic Council (GJC) recently held the first Banking Summit for Indian retailers and manufacturers. This pioneering initiative underscores the industry’s potential for growth and the pressing need to infuse more funds into the industry.

“Access to finance remains fundamental to the industry’s growth. Defaults negatively influenced the perception of the banking sector, which affected the relationship with banks. The goal now is to showcase the strength and reliability of the jewellery business to secure the necessary facilities from banks,” said Saiyam Mehra, Chairman of GJC, setting the tone for the day-long discussion.

Unlike Birlas, who can deploy massive funds and level up to the biggest brands quickly, most generational businesses and early entrants have taken a phased journey to growth. They gauged these shifts decades ago and shaped their strategies early on. Regarding the first growth phase, Suvankar Sen, Executive Director of Senco Gold & Diamonds, says, “We wanted to achieve extraordinary growth, in line with the Indian economy.

Increasing our credit limits with the bank seemed the best way to fund expansion. We took a quantum leap from 20 crore to 100 crore in the late 2000s.” He recalls how bankers were unfamiliar with the industry’s workings, making the process hard but worthwhile. The bank continues its partnership through the company’s growth from six stores in 2007 to 150 stores in 2024.

Ba Ramesh, Joint Managing Director and Co-founder of Thangamayil Jewellery Ltd. acknowledged the role of bankers in propelling his firm to a market cap of 3,485.87 crore. He says, “They are the most important partners in the journey. It would have been impossible to grow the retail business at this scale without this partnership.” Backed by banks, private equities, other investors, and eventually public funds, most of these players are formidable forces in the market today and maintain their journey at an accelerated pace.

Over the years, it has triggered a virtuous cycle for the industry, leading to a greater need for funding. Ashish Pethe, Partner of Waman Hari Pethe Jewellers (WHP), says, “The capital is finding its way into the market by way of increased inventory on the shelves. On the other hand, the customer is no longer patient, evaluating multiple choices. The competition is getting stiff, leading many players to rethink their growth strategy.”

The over-100-year-old entity plans to add 20 more stores to its existing 26 stores in two years. The jeweller has used bank funding and internal accruals, although it has avoided equity dilution. “It can be the most expensive way to borrow money, though we are warming up to the idea,” says Pethe. The expansion and capital infusion into the omnichannel space keeps pace with offline retail. WHP’s e-commerce wing, whpjewellers.com, recently secured $10 million in its inaugural funding round from a prominent Singapore-based investment. The company is poised to capture a significant market share with its unique, tailored offerings.

Notably, Bluestone, an e-commerce turned omnichannel retailer that entered the market in 2011, is expected to raise around $100 million in a pre-IPO funding round, likely at an evaluation of more than $1 billion. The rising start-up, which plans to open 500-600 stores over the next few years, will join the unicorn club even before it turns profitable (per market reports in 2025). Mehra highlights how “GST, hallmarking, and HUID regulations have improved transparency in the jewellery business. This gives banks more confidence in financing jewellers, as they can rely on accurate and verifiable financial information.” This regulatory framework is building a new finance and jewellery industry ecosystem. After all, “The industry needs banks as much as it needs good clients,” says Sen.

A first-generation jeweller, Rajesh Khandelwal, director of Khandelwal Jewellers, recounts his journey of the last 15 years. “Many years back, when we approached the IPO advisors, they declined our request. That was the degree of disregard and poor industry perception. The scene has completely changed in the last few years,” says Khandelwal. He credits government regulations and policies for building confidence in the investor community. Backed by bank funding, Khandelwal, hailing from a small town called Amravati, has built 5 large-format stores covering 19,500 sq. ft. of retail space. Steadily building his domination in Tier-3 cities in the Vidharbha region, he recently changed the company structure from a private to a publicly listed one and is well on his way to an IPO by 2027.

At the banking summit, Sachin Jain, Regional CEO India of the World Gold Council (WGC), explained this phenomenon well: “It is no longer about the number of years in business; it is now about big thinking and not big legacies. Access to funds will create many first-generation jewellers who will swiftly capture vast untapped opportunities.”

Changing loan metrics

Banks’ changing outlook towards the industry is further strengthened by the measures banks take to assess businesses’ potential. Kuldeep Jindal, General Manager of Bank of India, says, “Banks made a mistake earlier; we used to see only collateral. Banks no longer consider collaterals an integral parameter for disbursing loans.” According to banking experts, the issue of collateral compounds in the industry because the primary collateral is stock, the capital is more for inventory financing, and the collateral is a moving stock. Besides, bankers never have a deep understanding of inventory. Banks’ changing attitudes and evaluation metrics are corrective measures due to several NPAs, which were 30 per cent as of December 2021.

“Credit rating is the most important criterion for banks. Retailers often urge us to see their legacy, sales and stock value but have poor credit ratings. This lowers their creditworthiness and even impacts the cost of borrowing,” says Jindal. Adding another layer to the changing outlook of bankers, Kumar Parmani, Senior President – Trade and Bullion of Yes Bank, says, “Banks now focus more on the business model than collateral.

They consider the promoter’s background, business viability, and the company’s overall financial health. This includes an assessment of the operating profit, cash flow projections, and other financial obligations. Overall, this reassures banks of timely loan payments. Banks are now more concerned about return ‘of’ than return ‘on’ capital.” Therefore, demonstrating profitability and a sustainable business model is crucial regardless of the value of the collateral.

Mehul Thakker, FirstRand Bank’s Business Head, says, “Data brings much transparency. Sometimes, we see businesses performing better than expected; we even increase the
loan amount.” “The important part is to grow your credit limits continuously. As the business grows, profits and banks’ confidence also grow. And an IPO boosts it to a new level.”

ICRA’s recent upgrade of Senco Gold & Diamond’s credit rating in June 2023 raised its (rated) working capital credit limit from 900 to 1,200 crore. Transitioning from collateral-based to business model-based lending has opened the industry to numerous first-generation entrepreneurs. Data-based financing decisions allow new players with innovative thinking to score high on various parameters. Jindal says, “With a good credit rating, we even offer funds on 20 per cent of collateral. There have been cases when we have waived off collateral altogether. This also decides the relief one can get on the interest rate.”

Paradoxically, despite the growing trust and the inherent advantage of asset-backed stock, the jewellery industry’s share of credit is merely 2.75 per cent of India’s total bank credit issuance.
Neville Patel, Senior Vice President, HDFC, explains, “The difficulty in obtaining a small loan despite having substantial collaterals often stems from the quality of documents. Asset-backed loans should be easy to secure; the larger issue is the lack of proper documentation.”

Banks expect financial documents in a certain format. Prabu K.K., Chief Manager of Karur Vysya Bank, says, “There is low awareness about the document formats banks require. Properly formatted balance sheets and financial statements are critical for loan applications.” Besides the inability to secure adequate loans on favourable terms, there is a lack of willingness to take credit to grow the business. Chirag Sheth, Principal Consultant at Metals Focus, believes, “The low figures also indicate a lack of awareness of why credit should be taken.”

Given the checkered past, some feel that financial statement analysis is not the primary reason banks resist credit; trust remains an issue. Jain discussed the need for standardised regulatory policies to build confidence among all stakeholders. The WGC has initiated a Self-Regulatory Organisation (SRO) to establish a uniform and ethical code of conduct for the industry. Retailers can get themselves certified by the SRO, using it as a ‘mark of trust’ among stakeholders, including banks and customers.

Gold on loan

In addition to the capital needed for expansion, rising gold rates are increasing working capital requirements due to the growing cost of inventory. Most corporate and organised retailers use the banks’ Gold Metal Loan (GML) facility to meet their gold requirements. Ramesh, a long-time GML user, believes it is “one of the cheapest and most efficient ways of funding the metal requirement.” Many family jewellers argue that GML is not viable, as the benefit is more from the price rise than the savings on the lower cost of borrowing gold.

Ramesh opines, “You will benefit from a gold loan if increasing operating profit is your main goal. And that is also what the banks measure.” This requires retail jewellers to shift their focus from the notional benefits of rising inventory value to financial prudence for improving company performance. Bankers advise jewellers to reduce inventory rather than hold onto it and bear additional capital costs. Johnson Lewis, Managing Director of FinMet, echoes this opinion, “If retailers consider rate profit, they must not block capital in the retail business. There are gold speculative platforms where retailers can earn.”

A misconception exists that large organised players must utilise GML as investors mandate it for price risk mitigation. However, Rajesh Khandelwal, who has been using GML for 14 years, refutes this, saying, “We started our journey with GML to enhance profit margins. Our GML books have grown from 25 per cent to 70 per cent of our total inventory requirement. Most family jewellers have not understood how to utilise the facility profitably.” Khandelwal further explains that when used correctly, the total cost of a metal loan is between 4 and 5 per cent (including security margin money, interest charges, and GST), which is still cheaper than cash credit charges.

The process requires a well-structured management system and planned buying. Policies prohibit the outright transfer of gold borrowed under GML. This is a significant limitation for retailers who buy ad-hoc. Khandelwal developed a system where gold is issued to the manufacturer, who then raises a labour bill after 7-10 days. Khandelwal says they keep 30 per cent of their buying open for trade shows and vendors who cannot comply with their requirements. Khandelwal notes, “When used properly, GML can also benefit a retailer from the rate profit.” His small department, managed by three people and guided by the bank’s treasury team, efficiently utilises GML. Manish Goel, Head of Bullion Desk at ICICI, mentions, “There are times when the gold rates are lower than the market; those could be particularly beneficial.”

There is also a need to raise awareness and knowledge within the banking community. Rajesh Khandelwal recalls, “When I raised the query, the SBI bankers in Nagpur were unaware of GML. I travelled with the SBI manager, and we spent a few days in Mumbai’s bullion branch, understanding the modalities. Gradually, the local bankers understood the mechanism.”
Despite GML’s availability at a nominal 3 per cent, Sheth says, “If you look at the metal loan figures in the last 10 years, it has not gone above 120-140 tonnes. Not many in the industry use this loan facility.” As competition intensifies, improving margins is fundamental to success. Retailers must understand financial tools like GML to ease the burden of rising capital costs.

Funding growth
Hinting at more stringent regulations and new policies underway, Manish Gavaskar, Vice President—Bullion Sales & Analytics at RBL Bank, says, “Regulations are evolving daily to improve organisational practices and build a compliance framework to mitigate risk.”
Bijayananda Pattanayak, ex-Head of Gems & Jewellery business at IndusInd Bank, adds, “Regulations come into force based on system misuse experience. They are not framed to disrupt the business, and I have yet to see a business affected by regulation.”

Each bank has specific guidelines within regulatory policies. Avinash Gupta, CEO of Mamraj Mussadilal Jewellers, raises an important point: “Banks should collectively prepare a document stating the parameters that guide their lending decisions and the list of documents that a jeweller needs to prepare to qualify.” This will ease the industry’s understanding as it gradually moves toward a formalised ecosystem.”

Although restricted by regulatory bodies and not banks, Sen says there is an urgent need to consider EMI for gold jewellery. “Credit-based buying in India has gone up fourfold, yet gold jewellery cannot benefit from this due to policy guidelines.” He also asked bankers to look at cash flow statements differently, as the capital goes into buying stocks.

Nitin Khandelwal, Past Chairman of GJC, urged banks to consider differential products for the industry and reduce interest rates, as loans are all asset-backed. The emphasis was on tailored solutions for an industry that is unique in many ways. Pethe simplifies it for retailers, “Banks fund working capital needs. If a retailer can show how the funds will help grow the business and increase profitability, banks have no reason not to fund.” Pattanayak says that for retailers who have yet to start their journey with bank credits, “No credit rating is required. You can gradually get a rating and build a track record.”

According to a report by financial services firm Motilal Oswal, the Indian jewellery sector recorded a visible shift of more than 14 per cent towards organised players in the last five years. Flush with capital, a new wave of jewellery brands is disrupting the market. Massive capital infusion into the industry, combined with double-digit growth in per capita income, leading to rising disposable income, is bringing tectonic shifts in customers’ purchase journeys and expectations.

Consumers are revelling in the surge of daily wear designs thrust on their fingertips, indulging in enhanced occasion wear, fashion, and statement-making designs, and embracing the newer range of materials—lab-grown diamonds, silver, 10k to 14k, or demi-fine jewellery to choose from. Compelling marketing by these brands, some backed by celebrity investors, drives consumers to explore the increasing number of branded stores while enjoying multi-sensory retail experiences. Mehul Thakker, Business Head, FirstRand Bank, comments, “The new, large jewellers are receiving sufficient bank financing and support. We want to extend support to newer, smaller, and medium jewellers, where penetration is less.”

As bankers shift from suspicion to sureness and India transitions from a developing to a developed nation, businesses face a once-in-a-lifetime opportunity. There may be no better time for family jewellers to make bold moves and elevate their game.

(Note: The opinions of bankers, retailers, and manufacturers in this story are based on panel and open forum discussions at the recently held first Gems and Jewellery Banking Summit organized by the All India Gem and Jewellery Domestic Council (GJC) and interviews conducted on the sidelines of the summit).

Written by Soma Bhatta