Banks move cautiously on financing diamond firms

Insist on early corporatisation, external credit rating of units

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Banks have taken a cautious approach towards financing diamond companies, including sightholders (registered bulk buyers) of global mining majors such as De Beers and Rio Tinto, to check a further rise in their non-performing assets (NPAs).

After the 2008 economic debacle that slowed jewellery demand globally, even leading Indian diamond jewellery exporters failed to repay loans, thereby increasing the NPA burden on banks’ books.

State Bank of India (SBI), the country’s largest lender, has around Rs 11,000 crore and $600 million (Rs 3,290 crore) exposure to diamond and jewellery companies in India and abroad, respectively. The NPAs as a per cent of sectoral exposure are around six per cent.

“Diamond stocks held as collateral are not fixed assets which can be disposed any time. Stocks also pose a holding risk that banks would keep in mind before lending,” Shyamal Acharya, deputy managing director of SBI, told Business Standard.

Confirming his cautious approach to the sector, Acharya said on the sidelines of a seminar here that banks would step up due-diligence for the asset quality of borrowers in the diamond processing industry before sanctioning fresh loans, to avoid further swelling of NPAs. Gross NPAs at Indian banks swelled to Rs 1.79 lakh crore in December, up 43.1 per cent from Rs 1.25 lakh crore in the year-ago period.   

Antwerp Diamond Bank, the only foreign bank dedicated to financing diamond companies in India, has currently $20 million as NPAs financed to four large players out of its total disbursal of $100 million. According to Karl De Borger, chief executive officer, ADB, the lender is now clubbing personal assets of promoters for new applications.

After the 2008 financial crisis, a number of major diamond processing and export-oriented units became defunct, resulting in huge slippages (good loans turning bad).  

Today, banks seek collateral of 25-30 per cent from sightholders of Rio Tinto and De Beers, assuming that they would be creditworthy. But small players require to keep 100-120 per cent of the borrowed money as collateral. Consequently, lending to small players has become a challenge, which affects their working capital requirement.

The certification on the genuineness of the (collateral) material will be critical in our assessment of financing to the gems and jewellery companies, said H Mundra, chairman and managing director of Bank of Baroda.

Vipul Shah, chairman of the Gems and Jewellery Export Promotion Council, had earlier urged banks to lend to even small players with good credibility in India and abroad.

Responding to Shah’s observation, SBI’s Acharya said: “We have a portfolio approach and not an entity-based one. While we are ready to extend the all-round support with our dedicated branch in Bharat Diamond Bourse (Mumbai), Tel Aviv, Honk Kong and Antwerp, we need to step up our due-diligence to assess the quality of lending appropriately.”

Diamond processing is largely a family-owned business, where transparency and corporatisation are comparatively much lesser. They need to intensify transparency and provide required data support to take a concrete call on lending, said another banker, who did not want to be named.

Banks will give more emphasis on external ratings. Therefore, gems and jewellery companies have to increase their engagements with credit rating agencies. “Rating agencies are referees and you cannot dispute with them,” Acharya added.