India’s top-notch bankers address the financing issues at the Diamond, Gem & Jewellery Banking Summit 2014

Industry Watch July 2014Limited transparency in the gems and jewellery industry have restrained the Indian bankers from financing in the industry, as per the banking heads and finance officials that attended the Diamond, Gem and Jewellery Banking Summit 2014 at the Taj Palace Hotel, Mumbai.

The Gems and Jewellery Export Promotion Council (GJEPC) recently organized a banking summit for the diamond, gems and jewellery industry to discuss some prime financial issues that has been causing hindrances in the growth of the sector. They discussed about all the aspects and present issues on financing for the Gem & Jewellery Sector; look at the current scenario of ECIB and Credit Guarantee in Gem & Jewellery industry and other burgeoning issues faced by the industry with regard to banking & finance for exports for the sector.

During the inaugural session, Dr. Gurdial Singh Sandhu, Secretary, Financial Services, Ministry of Finance, GOI said, “Indian industry needs to adopt international practices whole heartedly, to grow both nationally and internationally. The government of India was compelled to act stringently in the larger interest of country by raising import duty on gold and introducing 80:20 gold import guidelines. The new Central Government is determined to serve the needs of all industries and we hope its full cooperation and support for the same by announcing more developments in the coming days.” He further added that, “export is a priority sector for the government of India and necessary steps will be taken by the Government to ensure its growth in the international market.”

Speaking about the core subject, Arundhati Bhattacharaya, the chairman of the State Bank of India (SBI), reminded the industry of the need to maintain the “three Cs” – confidence, corporatization and collateralization – to help strengthen its performance and bring it up to par with the international market. Her emphasis on the need for transparency in business operations and compliance maintenance within the context of the banking industry’s changing national and international markets was reiterated by S.S. Numdra, the chairman of the Bank of Baroda, a leading bank that provides financing to players from the gems and jewelry industry.

Both of them expressed their views about the potential of the gems and jewellery industry that can attract Foreign Direct investment in the country. However they also pointed at the certain market events happened in the industry post 2008 global economic recession which have created a large trust deficit between the bankers and the industry. They further said that the future of the industry seems to be positive as demand for Gems and Jewellery items both in the Domestic and International market has shown improvement.

Both of them felt the need for a portion of the gold deposits held by banks should be treated as part of the mandatory cash reserve ratio (CRR) or statutory liquidity ratio (SLR). “Gold is after all a store of value and is it possible for the regulator to treat a bit of our gold deposits as CRR or SLR instead of cash or government securities?’’, asked SBI Chairperson Arundhati Bhattacharya. Reiterating Ms. Bhattacharya’s view, S. S. Mundhra, Chairman and Managing Director, Bank of Baroda, said it made sense to treat a part of banks gold as CRR and SLR. “This fits the pattern that we want to unearth gold and bring it to more productive sectors of the economy.”

The current collective challenge is to uphold the trust shared between the bankers and traders and further need to strengthen the same to ensure this decade long fruitful association continues in the future. It is also a good sign that bankers too feel that they need to interact with the Government to discuss the issue of financing the consignment sale of jewellery from Special Economic Zones, especially SEEPZ at Mumbai.

The panel discussions highlighted that the industry now needs to be more transparent in their business operations. Due to lack of transparency in the industry, the confidence of bankers has been shaken which is making them reluctant to finance this industry to a large extent. Whereas the industry on the other hand feels that it is high time bankers initiate procedures to share and adopt best practices for each others to minimize their risks.

The Bankers were also concerned about ECGC’s refusal to do ECIB policies for enhanced credit limits. Whereas everybody agrees that this is not the ideal situation and will be a big hindrance in growth of exports, there is a general disagreement on who will take the risk ultimately, the banks or ECGC. The Industry clearly believes that , whereas banks cannot outsource their due diligence obligations and mitigate risks by only taking policies from ECGC on exporters turnover, at the same time ECGC should have adequate paid up capital from government to provide  requisite covers  to the high value industry like the Gem and Jewellery industry.

Mr. N. Shankar, CMD, ECGC stated that they need to limit their exposure to a particular industry and also cannot take the ECIB cover at its face value, which is sanctioned by the banks. However, he has promised to take up the issue of increase in capital and deduction of exposure limit from 50% to 40% which would further ensure the growth in the industry. The decision of introduction of multi-buyer policy has also been well received by the industry.

Bankers need to carefully follow the due diligence procedures and employ personnel for regular interaction with the industry. Banking developments like BASEL III regulations and provisioning of extra capital for unhedged foreign exposure by banks has impacted the industry. Bankers strongly feel that the track record of the promoter of the company needs to be assessed and examined carefully before financing his/her company.