Fearing defaults, banks rein in credit to Indian jewellery firms

Gitanjali Gems

16/01/2015 07:39

By Tanya Ashreena and A. Ananthalakshmi 
    NEW DELHI/SINGAPORE, Jan 16 (Reuters) - Indian jewellery 
firms are finding it increasingly hard to get credit to import 
raw material and ship out their wares as banks tighten the 
screws, worried about defaults and sharp practices in the 
sector.   
    The problem has become so acute that jewellery industry 
executives are sitting down for talks next Tuesday with finance 
ministry officials, said Bachhraj Bamalwa, director of the 
All-India Gem and Jewellery Trade Federation. 
    "Banks have classified gems and jewellery into the high-risk 
category," he said, adding the industry was already paying 
higher interest rates than other sectors.  
    Tight credit in the capital-intensive industry could hurt 
shipments from India, one of the world's top jewellery 
exporters, possibly pushing up the trade deficit and undermining 
 the rupee  INR=D2 .  
    Gems and jewellery account for about 15 percent of India's 
exports. Among the biggest jewellery exporters are Gitanjali 
Gems Ltd  GTGM.NS , Rajesh Exports  REXP.NS  and Asian Star 
 ASAN.BO . 
    The banks were shocked by a huge default by Winsome Diamonds 
and Jewellery  WINO.NS  in 2013. Indian media reported the firm, 
with affiliate Forever Precious Diamond and Jewellery, defaulted 
on some 60 billion rupees ($970 million) owed to creditors. 
    "Generally the banking sector is going very selectively on 
gems and jewellery. Winsome and Forever had beaten us badly," 
said the head of a state-run bank, asking not to be named. 
    It was unclear how bankers were deciding which jewellers to 
support. 
    Standard Chartered  STAN.L , State Bank of India (SBI) 
 SBI.NS , IDBI Bank Ltd  IDBI.NS  and ABN Amro  ABRGPA.UL  among 
others have become very cautious about their exposure to the 
industry, bankers and market sources said.  
    "The lack of credit in the industry is definitely a problem. 
Standard Chartered recently denied me a loan," said Prasoon 
Dewan, chief executive of Eurostar EXIM Pvt Ltd, an exporter of 
diamonds and precious metals.  
    StanChart had said the firm did not meet its guidelines and 
it viewed the entire jewellery sector as negative, Dewan said, 
adding SBI was also cautious.  
    StanChart said in an emailed statement it was not exiting 
the diamond and jewellery business but reviewed its client 
portfolio all the time to manage risk proactively. 
    Dutch lender ABN AMRO took a similar line in an emailed 
comment on its global policy. "ABN AMRO did not pull back but 
reassessed its portfolio, which is not uncommon (over) the last 
few years in the banking sector," it said.     
    A general retreat is clear, however: lending by commercial 
banks to the jewellery and gems sector in the 12 months to 
September 2014 grew just 1.2 percent, compared with 10.2 percent 
in other industries, Financial Services Secretary Hasmukh Adhia 
told an industry conference last month. 
             
    ROUND TRIPPING 
    One big concern for the lenders is "round-tripping", 
exporters and other market sources said.  
    Some jewellery firms ship the same stock back and forth 
several times to inflate their export figures, which allows them 
to seek bigger loans than they need so they can route some of 
the money to other, riskier investments, mostly in real estate. 
    Because of a slowdown in the property market, these 
companies are finding it harder to repay such loans.  
    "The banks don't want to burn their fingers, so they are 
tightening the screws," said an exporter, who spoke on condition 
of anonymity. 
    However, he had recently been able to increase his credit 
limit with Standard Chartered. "They have done their homework 
and are tightening credit only to risky companies. It's not 
across the board," he said.  
    Some say the Indian jewellery industry enjoyed easy credit 
in the past because of rules obliging banks to allocate a 
certain percentage of their financing to export activities. The 
sector seemed to be a safe bet then and credit is perhaps 
falling back to more realistic levels now.  
    What's more, the diamond industry is feeling a credit pinch 
all round the world, particularly with the winding down of 
Antwerp Diamond Bank, a top player in diamond financing.  
    "In India, some larger defects got quite some attention and 
the government and central bank are concerned about the high 
level of non-performing assets in the diamond and gold sector," 
Erik Jens, the CEO of ABN Amro's International Diamond & 
Jewellery Group, told Reuters in an emailed statement. 
    "We don't see an acute problem per se in India nor outside 
India. It is just a sense of realism which came to the market."  
 
($1 = 61.8900 Indian rupees) 
 
 (Additional reporting by Devidutta Tripathy in Mumbai; Editing 
by Alan Raybould) 
 ((ananthalakshmi.as@thomsonreuters.com; +65 6870 3726; Reuters 
Messaging: ananthalakshmi.as.thomsonreuters.com@reuters.net)) 
 
Keywords: INDIA JEWELLERS/CREDIT