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Funding for jewellers still paralysed due to side-effects of note-ban, GST

Bankruptcies commence, factories stay shut longer

Pavan Lall 

At a recent meeting between the government and representatives from the Gem Jewellery Export Promotion Council (GJEPC), leaders have stressed that the absence of finance for the cash-hungry industry is being addressed, but industry experts have warned that if the current situation persists, the consequences could affect the country's exports.  

The crisis was triggered by a couple of factors acting together — the multi-billion-dollar Nirav Modi-Punjab National Bank scam, combined side-effects of demonetisation and the goods and services tax (GST) regime, and further tightening of non-banking financial companies (NBFCs) by regulators following the Infrastructure Leasing & Financial Services (IL&FS) problems. 

"Banks have stopped lending, and have also curtailed existing limits, which are affecting the diamond industry," said Anoop Mehta, president of the Bharat Diamond Bourse. Last year, the diamond sector had witnessed bankruptcy, with at least four or five casualties reported in Mumbai, and around 20 in Gujarat, he said. "Factories are staying closed longer, and diamond houses have re-opened two weeks after the Diwali Holidays," Mehta said.   

Union Bank of India Managing Director and Chief Executive Rajkiran Rai G said, "Lending to existing clients is going on (but) there is no new business."  The bank had tightened the monitoring of books of borrowers from the gems and jewellery industries, he stressed. "The bank is also doing more due diligence on debtors or buyers who are borrowing from us." 

The jewellery industry has for long been petitioning the government to reduce duties on gold by 6 per cent from the current 10 per cent, and that on diamonds to 2.5 per cent from the present 7.5 per cent. Recently, Minister of Commerce and Industry Suresh Prabhu tried to boost the morale of the industry representatives with encouraging comments, but that did not work much. The reason was the fact that new money was not being disbursed. One Kolkata-based jewellery wholesaler, who declined to be identified, said, "regardless of what government officials, banks or industry bodies may say, business funding is frozen and stuck." 

Funding for jewellers still paralysed due to side-effects of note-ban, GST

Pankaj Jagawat, managing director, Shanti said banks did not see the difference between a company and a one, which was one of the major concerns. "They are two entirely different ball-games. is backed by international standards, easy to test and is accepted as currency while diamonds are much harder to grade. They need laboratories to tell the difference between synthetic and natural stones, and are much easier to mix in with a batch of regular stones."

The possibility of the slowdown affecting more players is greater if the industry doesn't get access to easier finance in the next six to eight months. "Banks should re-look at their lending practices as a shotgun approach does more harm than good," said Mehta.

Presently, India some $40 billion of gems and jewellry, and accounts for 7 per cent of the nation's Mehta cautioned that the threat of the slowdown crossing over into the export market was likely if the financing issues persisted.

For larger players, the picture is rosier. For net profits reported in the first nine months, ended September, as compared to the last year, Rajesh reported a 17 per cent increase, Titan Industries reported a 34.5 per cent increase, and Tribhovandas Bhimji Zaveri (TBZ) saw an increase of 53 per cent.

Colin Shah, GJEPC vice-chairman said despite the liquidity crunch, organised players had a strong footing for a variety of reasons, which include their lines of credit, and relationship with banks.

In the big picture, Orra Diamonds CEO Vijay Jain said, historically, long-term credit between 90 and 120 days was common. Now, because of sectoral headwinds the entire supply chain, which includes cutting and polishing, manufacturing, wholesale and retail, is affected with both the quantum of credit and duration reducing by around a third.

The pros, as Jain said, are a more organised industry. "Effectively, and has also brought in a level playing field between the formal and informal sectors in the trade, which had enjoyed a tax arbitrage," he said. So, while the absence of capital may not mean that there will be a widespread move for to file bankruptcy, there will be more temporary shuttering of shops, fewer employees at retail locations and factories, and longer non-manufacturing days. And also bad for customers in the form of reduced discounts.

First Published: Thu, November 29 2018. 06:54 IST