Indian banks have supported the Indian gem and jewellery industry over the years, so much so that today the sector has grown to become a world leader. However, in recent times due to many unfortunate incidents of defaults resulting in NPAs, banks have become wary and tightfisted in financing the industry. With margins reducing and end product prices becoming more volatile, it is not surprising that banks have restrained themselves from lending to the gem and jewellery sector.
A few large diamond financing banks have already left the industry, withdrawing from the industry totally, resulting in changes affecting the financing available to the industry; and alternates to bank financing.
While the larger diamond companies are comfortable with adequate bank finance support in India, the question for them is more about the cost of finance rather than their availability. However, the MSMEs are finding themselves struggling to access finance from banks as their sales are not in exports. Instead, they sell the diamond to larger domestic companies, who in turn export the diamond to overseas customers.
Most nationalised banks lend only against a full credit insurance cover. The problem arises when rating agencies and banks approach to risk management and assess potential clients. After ‘demonetization’ by the Indian government, a larger number of smaller unorganised units looked to follow the formal banking and financing channels.
The ‘Diamond Financing 2017: New Opportunities, New Realities’ seminar organised by The Gems & Jewellery Export Promotion Council (GJEPC) in the month of February coinciding with the 2017 Presidents Meeting in Mumbai, India. During the Seminar, bankers and industry members explored options on how banks can work with MSMEs as well as examine credit insurance and risk management mechanisms that can be improved by the lending banks.
The inaugural sessions were graced by Maharashtra State Minister, Jt. Secretary, Union Ministry of Commerce, Government of India, Chairman, Gem & Jewellery Export Promotion Council (GJEPC), Bankers and industry members. Praveenshankar Pandya, Chairman, GJEPC while tracing the Industry’s growth and hoping the financing banks will continue to support the industry even in the future, said that GJEPC was taking every step to make the sector further organised to enable banks to get concrete information to do the right due diligence while sanctioning credits. He said GJEPC is taking steps to corporatize MSME units in diamond cutting and polishing; and to further improve transparency in transactions in the sector, GJEPC is starting a KYC online networking platform for the diamond industry. Pandya also sought the formation of a Banking Committee that meets regularly to give direction to the industry.
From the central government side, Shri Manoj Dwivedi, Joint Secretary, Union Ministry of Commerce expressed great appreciation of the Indian gem and jewellery sector in India. He felt that the banking sector should create customised solutions for the gem and jewellery business in terms of new credit rating parameters, a modified modern relevant version of ECGC, standardised structures, guidelines for minimising risk and stimulating growth amongst MSMEs.
Ernest Blom, WFDB President said that as the global gems and jewellery business is facing liquidity issues, it’s time to introduce new financing models for the gems & jewellery business such as Peer to Peer (P2P) lending, Government supported lending schemes, etc. He suggested setting up of a Financing Task Force which includes members of the trade from all centres and spoke for continuous roundtable dialogues with the financial institutions so that real solutions could be found to any issues which arose.
With MSMEs being in the limelight during the seminar, one of the Indian bankers that are into diamond financing (Rajneesh Sharma, GM- Bank of Baroda), announced that it would help the MSMEs in diamond cutting and polishing business with finance. He said that the product will be launched soon on a pilot basis for units that procure roughs from large mining companies and supply finished products.
It’s obvious that while the manufacturing sector needs the finance and also survive on it, the lending banks too benefit a great deal financing such companies. In fact, as the MSME sector is in a major growth mode, it offers a great opportunity to banks to provide financing and thereby grow themselves. Besides, the MSME sector constitutes one-third of the total business, which is a great opportunity for the banks to provide financing. And by starting a KYC online networking platform for the diamond industry, the GJEPC has taken an important step to further improve transparency in transactions in the sector that is commendable.
Another problem faced by the sector is that different banks charge different rates which ranged between LIBOR + 2% to LIBOR +6% and other charges as well. In addition, Banks use ECGC cover, which adds to the burden raising the cost of finance by five times. Therefore, the need of the hour is to standardised the structure so that there is uniformity, so that borrowers are not unnecessarily burdened.