Promissory note replaces paper note system in diamond trade

New system aimed at formalising trade pacts to check defaults

Surat diamond traders, who have been at the receiving end of defaults and fraud cases to the tune of hundreds of crores, are trying to move out of the  chitthi (paper note) system to a more formalised format of agreement between trading parties. Close on the heels of Surat traders, more than 50 per cent of traders in Mumbai too adopted the new method.

According to Dinesh Navadia, president of the Surat Diamond Association (SDA), the  chitthi  system works on mutual trust. “We are trying to raise awareness among traders to discard the old system and move towards a more formal way, which is through promissory notes, or a practice we call 'jhangad'. This would mean the details of the diamond; the colour, cut, clarity as well as the payment details would be printed on a piece of paper carrying a revenue stamp,”" he said.

The traders in this Rs 90,000-crore industry have been facing losses out of defaults in payments, as the  chitthi system is not reliable, and fly-by-night operators misuse it. Navadia said in the last one-and-a-half years alone, the defaults would run into Rs 1,500 crore, and the industry is reeling under such losses.

The Gujarat Police on Monday arrested a diamond trader from Bharat Diamond Bourse (BDB) in Mumbai, who had defaulted payments worth Rs 53 crore, according to Navadia. But the defaulter might go scot-free if there is no documentary evidence against him.

Although diamantaires in Surat's Katargam, Varachha have stopped dealing in paper chits, a few traders still stick to the old ways. Kirti Shah, a diamond trader and polisher, said, “Many units still follow the old chit system. While it is true that the industry has suffered losses in the past few years, it has been functioning for many decades.”

“People from several businesses have invested in the diamond business in Surat and Mumbai, and when they make losses defaults happen. Moving towards a formal documentation would not make much of a difference,” he adds.

Navadia, however, is confident that over the next one year, most of the Surat-based units would shift towards jhangad . The industry, which thrived on family and community relations, has now expanded beyond community boundaries, and traditional methods would have to new methods, feel traders.