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Industry, banks and government talk solutions to the crisis of finance



Key industry stakeholders representing the gems and jewellery industry, banks and governmental organisations that support the industry participated in a recent seminar titled “Diamond & Jewellery Financing 2018: Mitigating Risks Effectively”. The event was organised by the Gem and Jewellery Export Promotion Council (GJEPC). The focus of the event was the release of the GJEPC’s latest white paper on the challenges to financing faced by this industry and its bankers.

The presentations and the panel discussion that followed made clear that all the stakeholders in attendance were unanimously resolved to build and support transparent business practices across the banking and jewellery industries. With Lata Venkatesh, executive editor, CNBC-TV18, acting as moderator, the panel chiefly comprised highly regarded professionals from both these sectors.

The finance industry was represented by P N Prasad, deputy managing director & Chief Risk Officer, State Bank of India (SBI); George Abraham, general manager–Specialised Industries Group, Emirates NBD; K K Taneja, field general manager, Central Bank of India; Biju Patnaik, executive vice-president and head (gems and jewellery), IndusInd Bank; and M Senthilnathan, executive director, ECGC Ltd (formerly the Export Credit Guarantee Corporation of India).

The jewellery fraternity was represented by Russell Mehta, managing director, Rosy Blue India; Sanju Kothari, convener, Banking, Insurance and Taxation Committee, GJEPC (BITC–GJEPC); Rajiv Mehta, managing director, Dimexon Diamonds; and Mavjibhai Patel, managing director, Kiran Gems.

The Government of India was represented by Manoj Dwivedi, joint secretary, Ministry of Commerce and Industry.

A valuable thread of discussion grew out of one question raised before the panel: are bankers currently reducing credit limits for the gems and jewellery industry? Prasad of the SBI agreed that a few leading financial institutions exited the financing chain after the alleged Nirav Modi–Mehul Choksi scam, and said that this may have reduced exposure to the gems and jewellery sector. There could be reasons for this, he added, mentioning delinquencies and lack of compliance by some jewellers.

“Credible valuation, credit risk and the opaque nature of the business are some issues [standing against] the diamond sector,” Prasad said. “There are no new entrants and there is a lack of professionalism and of corporatisation of business.”

Mehta of Rosy Blue countered this claim. “All public sector banks are owned by the government,” he said, “and officers are bound to go by the book in light of the unfortunate incident in February [referring to the Modi–Choksi scandal], instead of how they used to function before that. As a result, small and medium enterprises [SMEs] are finding it hard to get finance, given the cumbersome paperwork and procedures.”

Asked whether the leading private sector banks will pick up financing opportunities that the PSBs do not, Patnaik of IndusInd Bank said that appetite alone does not make a business appear look palatable to a bank. “We assess whether there is a bankable risk that we can write in the books,” he explained. “The GJEPC’s MyKYCBank proposal was presented as a way to assure transparency, particularly to lenders. Are the bankers convinced?

Taneja of Central Bank responded that, in this regard, a borrower’s collection, capacity, capital and condition are the key aspects bankers look into before they decide to fund a business. “From 2008 to 2013, our finance to the diamond industry grew by a CAGR of 50 per cent per annum. But we stopped as we realised that, in the rough diamond business, very few players control the diamond supply from mines, and they don’t provide capital, while mid-stream players seek more capital than they are entitled to. This deters bankers, who would otherwise be happy to go as far as 20 per cent CAGR in funding to the sector — if they knew the optimum funding needs.”

Picking up on one of Taneja’s observations, Dwivedi of the Ministry of Commerce and Industry wondered whether diamond miners could provide credit down the supply chain, and whether the government could ensure this through international diplomacy. India’s gem and jewellery industry, Taneja said, has sufficient global weight to make this a proposal worth considering.

There was a time, he went on, when the Indian government had a 50% stake in the trade of Indian rough diamonds and traded diamonds. Over the years, however, market forces took over and the government stepped back to take on the role of regulator. “I think the GJEPC’s members should create a fund to back any need of the industry, and regulate practices rather than rely on a third party like ECGC.

In turn, ECGC’s Senthilnathan was asked whether the company would lift the sealed exposure regulation once it had assessed the MyKYCBank norms. He said that ECGC had been working with the GJEPC ever since 2002, and had begun risk mitigation in 2009. According to that arrangement, Senthilnathan said, a company that needed cover would have to get prior approval from the GJEPC.

But he also had words of caution, born out of experience. “From 2009 to 2012, we saw a runaway increase in credit requirements not matching export growth,” he said. “When default happens in the post-shipment stage, stocks are sold to the associate buyers. Loss-recovery in the gems and jewellery sector has only been 7 per cent as compared to 23 per cent across all industries. In case of defaults, the stocks are sold to foreign buyers, 90 per cent of whom are related to industry members so nothing comes to the bank.”

In 15 years of risk analysis, he said, “Out of 20 credit-intensive exporters, 10 were from the gems and jewellery industry at one point of time. Since the losses are big to handle, we prefer that an exporter go for an individual cover where incremental increase of credit is allowed.”

Seeking ways to mitigate the 12 per cent increase in reinsurance caused by such defaults, Mehta suggested that ECDC start financing transparent and efficient companies instead of incurring losses from the entire industry and certain unreliable entities. Kothari of BITC–GJEPC seconded this suggestion, adding that SMEs deserve a significant share of ECGC’s finance as they account for the fewest cases of default.

Bankers would like the jewellery industry to export through the safer route via banks, said Prasad of SBI. Accordingly, Abraham of the UAE banking group Emirates NBD was asked whether the MyKYCBank norms were sufficiently reassuring to encourage investment. “I don’t want to blindly take a risk,” he said, “as I must adhere to my capacity and strategy. The problem with the industry was that only two or three banks were available to finance it internationally, and those banks got greedy, not allowing other banks to step in.”

To close the discussion on a forward-looking note, the panellists were asked to raise one demand each that, in their opinion, would be beneficial for the gems and jewellery industry and its bankers. Senthilnathan suggested that strict norms under MyKYCBank would ensure that exporters follow regulations and relieve ECGC of its burden of verification. Abraham urged the gems and jewellery industry to self-regulate effectively so that scams like the alleged Modi–Choksi debacle never happen. Taneja proposed structured financing with banks able to get information about the diamond supply chain through blockchain technology. Patnaik lauded the idea of stock valuation while Prasad called for more receivable insurance.

Thanking them all, the GJEPC’s Kothari acknowledged in particular the suggestions of the panellists from the banking sector. The session concluded with a unanimous vote in the affirmative for a joint banking and jewellery industry panel.

News: Shubham Dasgupta, Retail Jeweller News Service

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