Diamond financing: IndusInd jumps in where other banks shy away

Becomes the largest pvt sector lender in a segment that most banks have exited

IndusInd Bank’s acquisition of the diamond/jewellery financing business of Royal Bank of Scotland (RBS) in India comes after most lenders have exited the segment.

IndusInd agreed to the deal for Rs 4,500 crore, becoming the largest private sector lender to the segment. This comes at a time when non-performing assets are seeing a sharp rise in public sector banks (PSBs) from the gems & jewellery (G&J) sector.

Romesh Sobti, managing director, IndusInd, told Business Standard they had very low delinquencies in this portfolio. “Our partnership with ABN Amro (which ran this line, under RBS) will help us get their global skills and knowledge in this business. Our book is seeing a growth of 45 per cent and our combined portfolio should see a similar growth,” he said.

He added all employees will move to the bank and as the business expands, they would hire more for the segment.

A report by Nomura on the deal said the risk could be of high delinquency in the diamond business, given the experience of PSBs. However, the report said, “IndusInd’s management indicated the lending is to top marquee names in the diamond business and historic credit costs have been low in this book.”

Data show that about 5.3 per cent pf PSBs’ exposure to the G&J sector was non-performing in March 2013. In 21 months, by December 2014, this had grown to 14.4 per cent.  

Indian banks, especially PSBs, have remained wary of increasing their financial support to this segment. Besides the NPA challenge, lack of transparency in operations and diversion of funds were also seen as problems in ties with jewellers.

According to Reserve Bank of India data, the pace of lending to the G&J sector had decelerated to 4.9 per cent growth in the 12 months into February 2015, compared to 17.8 per cent growth in the previous 12 months. The credit dues to the sector were Rs 73,100 crore in February 2015.

Recent cases like Winsome Diamonds, where banks took a hit of about Rs 6,000 crore, have been a cause of worry, due to which banks are choosing to stay away from this business. Indian jewellery firms are finding it increasingly hard to get credit from banks.

PSB executives said intermingling of businesses — gold, diamonds and jewellery — made it difficult to separate the business streams and understand their working. Also, some companies were doing interest rate arbitrage and there was concern about selling on a consignment basis, as well as sales to associates.

Also, say bankers, they had come across instances in which funds disbursed to G&J companies were used in the capital market and in real estate.