The Rs 5-trillion gems and jewellery industry in India is facing a huge liquidity crisis due to the reluctance of lenders to finance working capital loans over fears, which have been sparked by a couple of precedents set in the past few months, of default.
Industry sources said that banks have blacklisted the entire gems and jewellery sector and are not funding working capital loans, especially to small and medium enterprises (SMEs), due to insufficient collateral backup for recovery in the case of a default. Banks, according to industry sources, are seeking 200 per cent collateral for working capital loans, with 100 per cent in the form of actual mortgage and another similar amount of stock under their custody.
The non-availability of funds has hit small jewellers' operational efficiency, including their sales and expansion plans. Further, a number of small jewellers are on the verge of closure due to the scarcity of capital needed to support their business.
"The gems and jewellery sector has the least exposure of bad loans and non-performing assets to banks. Yet, the sector is being victimised and blacklisted for the misdeeds of one or two entities, resulting in a huge liquidity crisis for the entire sector. If this issue is not addressed at the earliest, then a number of jewellers would curtail their businesses, resulting in huge unemployment," said Nitin Khandelwal, the chairman of the All India Gems & Jewellery Domestic Council.
While a couple of jewellery exporters had become bankrupt in the past, the latest default by Gitanjali Gems and Nirav Modi -- with a payment overdue of Rs 125 billion -- has forced lenders to tighten their lending norms. A handful of rough diamond importers have also been caught by the Department of Revenue Intelligence (DRI) for alleged manipulation in the valuation of import consignments.
To address the issue, however, a number of jewellers met with Finance Minister Piyush Goyal twice in the last two weeks, seeking his intervention to promote the gems and jewellery trade in India through the smooth financing of working capital loans.
"Banks have asked jewellers either to bring in more collateral to back the existing borrowings or reduce their loan book in a time-bound manner. As a result, the sector is witnessing a large reduction in funds flow. Moreover, there are instances when companies have reduced exposure and yet the bankers are not providing loans. To reject the loan proposal, lenders seek unusual compliances from the corporates," said Khandelwal.
The gems and jewellery sector contributes 7 per cent of India's gross domestic products (GDP) and 13 per cent of the country's total merchandised exports.
Employing over a million people, the sector is a unique combination of large corporates and small family jewellers engaging uneducated youth across the value chain.
"The survival of many jewellers is at risk today. Heading towards closure, a number of jewellers have already reduced their operations during the past few months due to non-availability of floating fund," said Ashok Minawala, partner, Danabhai Jewellers, a Mumbai-based jewellery firm.
A recent Care Ratings study showed a prolonged slowdown in India's gems and jewellery sector despite positive long-term demand in the wake of robust economic growth forecast.
"Even as long-term demand is expected to remain steady due to overall economic growth and the greater proportion of middle-class consumers, in the short-term, the credit restrictions by banks, the emergence of additional scandals, and geopolitical tensions would continue to impact the diamond sector," said Madan Sabnavis, chief economist, Care Ratings.
As the industry employs a significant number of people, directly and indirectly, any prolonged slowdown, especially in exports, would negatively impact employment in the sector. However, a recent decision to reduce import duties on jewellery by China could support exports and positively impact the sector, he added.