Nirav Modi fraud a stray incident, won’t impact profile of genuine jewellers: Expert

Corporatisation of business structure and winning consumer trust are keys to build a good confidence with the banking sector and an easier path to get finances

Nirav Modi, a world-famous jeweller, has had a catastrophic depletion of reputation with his alleged involvement in a Rs 11,300 crore fraud with Punjab National Bank (PNB) filing a complaint against Modi with the CBI, alleging that a PNB employee helped swindle the amount from overseas branches of multiple Indian banks without routing the transaction through the core banking system (CBS).

The mammoth financial irregularity started when the deputy general manager of the Mumbai branch of PNB, Gokulnath Shetty, in 2011 issued Letters of Undertaking (LoU) without any collateral from Modi’s company. Shetty issued the LoUs for 365 days, as against the rule of an LoU having a 90-day limit, and sent messages to overseas branches of banks such as Allahabad Bank and Axis Bank to give dollar loans on behalf of Modi for payment of import bills. This was done by bypassing CBS and using SWIFT messaging system that transfers hefty transactions across international borders. This malpractice continued since 2011 as two accused PNB employees logged into SWIFT, filled up necessary details such as account number, got it endorsed by a supervisor and validated by the bank. Shetty retired last year, hoping the fraud to be under the wraps for at least a year until his successor raised an alarm when representatives from Modi’s firms approached the branch for fresh loan in January and contested that they have been availing this facility without showing any collateral.

With Nirav Modi still out of India and transactions of other big jewellers such as Ginni, Gitanjali and Nakshatra being flagged for irregularities, the Indian government is demanding reports of related bank frauds to reach them by the end of this week. Industry sources say this scam will make insurance companies more cautious and may overhaul the entire finance discourse of the gems and jewellery industry with relook on banking sector regulations and its link with RBI, the diamond and jewellery industries. However, bank officials also claim that this is an organisational fault of the bank involved and not a systemic risk in general as banks, though tightening the noose around fund flow to jewellers at the moment, will not deprive genuine parties of the money they need for transparent business. Sources also added that jewellers need to build a long-period of trust and confidence through their transactions, and those accused in this scam had a very good report with the banks earlier. The Retail Jeweller spoke to B Madhuprasad, chairman of investment bank and brokerage house Keynote to know the implications of this scam into loan disbursal to jewellers in future.

Agreeing to the fact that there are no lending norms for gems and jewellery sector as it is for manufacturing and other sectors, Madhuprasad said, “For gems and jewellery industries, the general assessment for working capital is based on the extent of turnover which an organisation is capable of doing. The assessment is required for purchase of stock, the credit period given to the debtors and for other current assets.  However, funds are not required where credit for the purchase of goods/stock is available. Bank funds the requirements of any industry for working capital based on the current assets minus current liabilities which is the working capital gap.  Obviously, the promoters or the industry has to bring in margin money for availing such working capital which is normally 25% of the current assets.  In respect of gem & jewellery industries the pattern of lending and the method of lending have to be put in place.  But it is difficult to assess the value of the current assets to determine the extent of bank limits required.  Furthermore, no credit is available for the raw materials purchased for processing of gem and jewellery.  This puts pressure on the industry to bring in more margins to avail the bank limits.  One of the most key concerns of the banks is the assessment of the value of funds required by the industry and also non-availability of adequate collateral security to secure the bank finance.”

Instances like Nirav Modi’s are stray incidences and do not hamper a genuine jeweller’s prospect to get loans from the banking sector, believes the Keynote chief. “Sometimes, when most of the companies in a particular sector perform very well, there could be few odd companies which could be defaulters.  Banks do their individual assessments of deserving corporates to get the Bank funding. Lending takes place on a case-to-case basis considering the golden rule of lending to ‘fit and proper persons’.  The image of the industry in the recent past has improved on account of the fact that few jewellers with a corporate background have been able to get their equity shares (capital) listed on the stock exchanges,” maintained Madhuprasad.

When asked how jewellers can improve their credit rating and boost chances of getting loans, Madhuprasad opined of corporatisation of their businesses. “The jewellers should give their business a corporate structure, focus on good corporate governance and put in place excellent, ethical commercial practices.  The important aspect for money to be raised either from the market or from the banks is that the business should depict exemplary qualities of winning the trust of customers.  It would also be relevant that like few of the jewellers who had listed their equity in the exchange, some more should follow these jewellers which will not only enable them to raise money from capital market but also get a great image from the banking institutions,” he concluded.

By : Shubham Dasgupta
Image courtesy: News18