Funding for jewellers still paralysed due to side-effects of note-ban, GST

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Despite a recent interaction between government and officials with Gem Jewellery Export Promotion Council (GJEPC), leaders say the absence of finance for the cash-hungry industry is being addressed, while others warn that if the current scenario persists, the impact could affect the country’s exports as well. What became a perfect storm because of the multi-billion dollar Nirav Modi-Punjab National Bank scam and combined side-effects of both demonetisation and the new GST tax, finally spilled over with further tightening of NBFCs by regulators after IL&FS’ problems were reported.

“Banks have stopped lending and have also curtailed existing limits which are impacting the diamond industry,” says Anoop Mehta, President of the Bharat Diamond Bourse, adding that in the last year, there have been bankruptcies in the diamond sector with at least four or five casualties in Mumbai and around 20 in Gujarat. “Factories are staying closed longer with diamond houses that re-opened a full two weeks later after the Diwali Holidays,” Mehta adds.

When asked his view, Union Bank of India’s managing director and chief executive Rajkiran Rai G said, “Existing lending to existing clients is going (but) there is no new business.”

He went on to say that the bank had enhanced the monitoring of books of borrowers from the gems and jewellery industries. “The bank is also doing more due diligence on debtors or buyers who are borrowing from us.”

The jewellery industry has been petitioning the government to reduce duties on gold by six per cent from the current 10 per cent and to 2.5 per cent from 7.5 per cent for diamonds and recently, commerce and industry minister Suresh Prabhu made encouraging comments to industry representatives but morale remains low.

That’s because the ground reality is new money isn’t being disbursed. One Kolkata-based jewellery wholesaler who declined to be identified said, “Regardless of what government officials, banks or industry bodies may say, business funding is frozen and stuck.”

Pankaj Jagawat, managing director with manufacturer Shanti Gold says one problem is bankers don’t see the difference between a diamond company and a gold one. “They are two entirely different ball-games. Gold is backed by international standards, easy to test and is accepted as currency while diamonds are much harder to grade, need laboratories to tell the difference between synthetic and natural stones, and are much easier to mix in with a batch of regular stones.”

The possibility of the slowdown impacting more players is greater if the industry doesn’t get access to easier finance in the next six to eight months. “Banks should re-look their lending practices as a shotgun approach does more harm than good,” Mehta adds.

Presently, India exports some $40 billion of gems and jewellery and accounts for seven per cent of the nations GDP. Mehta cautions that the threat of a slowdown crossing over into the export market is likely if financing issues persist.

For larger players, the picture is rosier. For net profits reported in the first nine months ended September as compared to the last year, Rajesh Exports reported a 17 per cent increase, Titan Industries reported a 34.5 per cent surge, and Tribhovandas Bhimji Zaveri (TBZ) saw an increase of 53 per cent.

Colin Shah GJEPC vice chairman, says that despite the liquidity crunch organized players have a strong footing for a variety of reasons that primarily include their lines of credit and relationship with banks.

In the big picture, Vijay Jain, CEO of Orra Diamonds says that historically long-term credit of between 90 days and 120 days was common but now because of sectoral headwinds the entire supply chain that includes diamond cutting and polishing, manufacturing, wholesale and retail is impacted with both the quantum of credit and duration reducing by around a third.

The pros as Jain says are a more organised industry. “Effectively, GST and demonetisation have also brought in a level playing field between the formal and informal sectors in the trade which had enjoyed a tax arbitrage,” he says.

So, while the absence of capital may not mean that there will be a widespread move for companies to file bankruptcy there will be more temporary shuttering of shops, fewer employees at retail locations and factories and longer non-manufacturing days ––and bad news for customers –– in the form of reduced discounts.

Courtesy: Business Standard/ Image: Business Standard

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