National News
Ghosts Of Frauds Past Haunt Indian Jewellers As Banks Raise Alarm
It's an unpleasant deja vu moment for India's jewelers, who are involved in cutting or polishing 12 out of 14 diamonds sold in the world.
“To date, not once had my lender asked me about this charge,” Parekh said over the telephone from Kolkata, where his family-run jewelry export business is based. “But now, they are raising queries for everything.”
It’s an unpleasant deja vu moment for India’s jewelers, who are involved in cutting or polishing 12 out of 14 diamonds sold in the world.
In 2013, Surat-based Winsome Diamonds and Jewellery Ltd., owned by Jatin Mehta, was declared a willful defaulter by the banks. Winsome and two associate companies, owed banks including Standard Chartered and Punjab National Bank, about 68 billion rupees ($1 billion), and investigations are ongoing.
Winsome was a watershed moment for Indian banking as it was the second-biggest corporate default after Kingfisher Airlines at the time, prompting lenders to put the gems and jewelry industry in the high-risk category and reduce credit to the segment.
“After the Winsome episode happened, the industry’s confidence levels were hit and the banking industry had almost zero confidence in the sector,” said Vipul Shah, managing director of exporter Asian Star Co. Ltd., by phone from Mumbai.
Banks have become very cautious over the past two weeks about lending to the segment, and steps are being taken to ensure that credit is given only to genuine exporters and not those engaged in so-called round tripping, which involves importing and exporting the same consignment repeatedly to benefit from lower interest rates on loans from banks, according to people familiar with the matter.
Bankers are reviewing all diamond and jeweler-related accounts and in some cases are seeking more collateral and extra documentation, they said.
Shah, who was the chairman of the government-sponsored Gem & Jewellery Export Promotion Council during the turbulent period following the Winsome default, said that the industry had a tough time restoring the banking industry’s confidence.
“The diamond business is entirely based on trust,” he said. “Now the trust factor is gone. How to make sure that something like this doesn’t happen in the future?”
Globally, companies polishing and trading diamonds depend on short-term finance to purchase rough stones, which are sold at a profit to repay the loan. Fewer banks are willing to provide that service.
In 2016, Standard Chartered, then one of the two leading lenders to the industry, said it was exiting its $2 billion diamond financing business, while KBC Group NV’s Antwerp Diamond Bank, which made up about a 10th of the financing market at its peak and served the industry for 80 years, is being wound down.
India exported $43 billion worth of gems and jewelry in the year ended March 2017, accounting for about 16 percent of the country’s total merchandise exports, according to the trade body.
“This is a very sorry situation when we are trying to be the world leaders in the jewelry field and these kinds of things happen,” Shah said. “It will disturb the business.”
With bank credit expected to tighten, production is estimated to decline hitting exports and may even lead to job losses, according to Pravin Nanavati, owner of Surat-based SHE Jewels and a former president of the Surat Diamond Association. “There is no other entity that can lend the huge sums that the industry needs,” Nanavati said.
While the industry is not to be blamed for the debacle, as it is an isolated instance of misuse by some individuals, the sheer scale of the money involved in transactions makes it vulnerable to such incidences, said Anoop Mehta, president of the sprawling 20-acre Bharat Diamond Bourse in Mumbai that houses the bulk of the gem and jewelry exporters in the city.
“The magnitude of the fraud is mind-boggling,” said Mehta, who has been working in the sector for nearly four decades. “One is shocked, but at the end of the day, to put the whole thing on the industry is ridiculous. But if I go to Punjab National Bank today and say I want to enhance my limit, I know he is in no mood to do it. It is unfortunate.”
The Punjab National Bank in its complaint to the federal investigation agency — the Central Bureau of Investigation — alleged that the fraud was led by Nirav Modi.
PNB has also registered a case against Mehul Choksi’s Gitanjali Group of companies for alleged loss of 48.87 billion rupees to the exchequer, according to the CBI. Shares of the jeweler’s Gitanjali Gems Ltd. have slumped 67 percent this month in Mumbai.