Tough credit rules for diamond trade

MUMBAI: Banks might be renewing annual credit limits for their clients in the diamond trade but with riders that could make the use of the entire sanctioned amount quite difficult, according to traders in the precious stones of which India is the world’s biggest polishing hub.

Lenders want direct billing exports to be cut from 75-80 per cent to 25-30 per cent as a percentage of sanctioned limits, while bank-through-exports be raised from the current level of 10 per cent, merchants said, requesting anonymity as credit appraisals are ongoing. A banker confirmed that state-run lenders were stipulating drastic reductions in the direct billing practice. They want clients to give extra collateral.

Norms are being tightened after India’s biggest banking fraud came to light last quarter.

If a bank now sanctions a ?1-crore credit limit for a client, a trader can use only ?30 lakh to ship a diamond parcel directly to a client or to its overseas office. “Banks now want most exports to be bank-through type, and it will make the use of the sanctioned limits very difficult,” said a DeBeers sightholder.

“Most clients prefer direct billing than going through banks.”

A bankthrough export involves a buyer’s bank dealing with the seller’s bank.

The insistence on bankthrough exports seeks to prevent round tripping – rotating set of diamonds to show enhanced turnover and get more credit limits. Bank-through exports result in more accountability as the seller realises payment only upon presentation of shipment bills to its bank.

Colin Shah, vice-chairman, Gem & Jewellery Export Promotion Council (GJEPC), said: “For now at least, we have not heard of any fallout in terms of non-renewal of sanctioned credit limits, but it is hard to say what will happen, going forward. We are engaging with bankers to sort out issues related to credit limits, collaterals, etc. Industry, led by GJEPC, will officially meet with bankers on May 11 to thrash out these issues in the presence of commerce minister Suresh Prabhu.”

Another diamond merchant said bankers were asking for additional collateral. This collateral is different from the businessrelated prime security of rough diamonds that are hypothecated to a bank or post-shipment credit given to an exporter against receivables. It can be factory premises or 100 per cent bank guarantee or other assets not related to the business. “Against 25 per cent earlier, banks are now asking for 50 per cent collateral,” said another diamond merchant. “We will have to see how these measures impact business.”

Sabyasachi Ray, ED, GJEPC, said that extra collateral was being demanded only in cases where clients were seeking enhanced credit limits and not for renewal of existing limits.

GJEPC said on Thursday that gross exports of gems and jewellery declined 5 per cent to $ 40.97 billion in FY18, primarily due to a 60 per cent slump in exports of fashion jewellery, gold medallion, pearls, etc. But cut and polished diamond exports rose 4.17 per cent to $ 23.73 billion, while gold jewellery exports climbed about 11 per cent to $ 9.6 billion. Much of the fall in medallions was because of the government ban on 24-carat jewellery exports.

Diamond merchants say that medallions were masquerading as jewellery.