More focus on corporatisation and investment grade ratings
Banks will step up due diligence with regard to asset quality of borrowers from the diamond processing industry. This will help avoid increasing the non-performing assets (NPAs) on their books, according to Shyamal Acharya, Deputy Managing Director of State Bank of India (SBI). He said diamond stocks posed a holding risk for banks, which must be kept in mind before lending to the industry.
Mr. Acharya was addressing a seminar on ‘Emerging trends in financing of Indian diamond and jewellery sector’ organized by the Gems & Jewellery Export Promotion Council (GJEPC).
He said that with the Basel III norms in effect, companies now needed more reserve capital to do the same size of business, resulting in higher cost of borrowing.
“At the same time, banks will have to look at clients with stricter due diligence, focus more on corporatisation and investment grade ratings,” he added. Exports by major diamond processors were impacted by the global economic crisis and huge loans could not be repaid.
“As a result, today, while banks need collateral of 25-30 per cent from sight-holders of global mining giants like Rio Tinto and De Beers, for smaller players it can be 100 per cent plus and in some cases 300 per cent,” said Vasant Mehta, former chairman, GJEPC & Vice- President, International Diamond Manufacturers Association (IDMA).
The Indian gems and jewellery industry is estimated $35 billion and India processes 95 per cent of the world’s diamonds. Currently, Indian banks provide credit worth around $3 billion to Indian diamond and jewellery companies.
Saunak Parikh, co-convenor, BITC, GJEPC, said there was a need for the system to address the currency mismatch.
“There is need for dollar financing but the sanctions are in rupees. Also needed are innovative financial products and better risk management,” he said.
Eric Jens, CEO, ABN AMRO Bank, International Diamond & Jewellery Group, said that the days of easy access of capital globally were gone.
“The economic crisis has left scars on the global economy and while there are new opportunities, the keyword is change. An effort is required by the diamond industry to keep up with the changing reality.”