PNB fraud: Gems & jewellery industry bad loans may rise to 30%, says CARE

Over 7,000 job losses feared, with about 2,800 heads rolling at Gitanjali and Fire Star alone

Facing brunt of the near $2 billion trade finance fraud at Punjab National Bank, the Indian gems and jewellery sector may buckle under the burden of bad loans. According to CARE Ratings, the stressed loans of the industry may swell to 30 per cent of total loans from the present 11 per cent level.

The total credit outstanding to the sector as of December 2017 is Rs 690 billion. This constitutes about one per cent of Rs 72.63 trillion of gross bank credit. The stressed assets ratio for the banking system as of September 2017 was 12.2 per cent. Gems and Jewellery sector reported 11.7 per cent stressed advances ratio, which was lower than the sample average.

PNB has alleged that one of its former employees provided jeweller Nirav Modi and his associates with guarantees to obtain loans from abroad. Between 2011 and early 2017, guarantees worth Rs 65 billion were issued without any collateral, followed by another Rs 49 billion between March and May 2017. The total quantum of the alleged fraud is Rs 114 billion ($1.8 billion). This number increased later to Rs 123 billion after PNB informed the stock exchanges last night that the quantum of reported unauthorised transactions rose by $204.25 million.  

CARE Ratings said the two companies, Fire Star and Gitanjali Gems, have reported borrowings of around Rs 160-170 billion. This is as per annual report and other sources and on the assumption that there are no other loans from other banks than is reported.

Overall gross NPA ratio for this sector based on outstanding, including the contingent liability falling due as of December 2017, would work out to about 30 per cent. A simulation analysis shows NPA ratio could move up to at least 30 per cent for this sector from 11.7 per cent as of September 2017, CARE said.

The gems and jewellery retail market in India is estimated to be worth Rs 3.9 trillion, of which 30 per cent is controlled by formal retailers. Recent developments in the sector suggest shutdown of two ot its large players.

Referring to the adverse fallout of these events on jobs in this sector, CARE said Gitanjali Gems is among the largest jewellery retailers in the country. The two companies, Gitanjali and Fire Star, had 648 and 2,200 employees on their rolls, respectively, as per filings in March 2017.

A combined 3,000 persons would be rendered jobless, while another 7,000-8,000 temporary workers and employees at franchisees are expected to be affected. The sector employed 22,000 people as per data available for 22 companies from a sample of 34 firms and the two companies constitute 12-15 per cent of the total industry workforce, excluding craftsmen and temporary employees, it added.