Ghosts of past frauds haunt $60 bn jewellery industry as banks raise alarm

Ghosts of past frauds haunt $60 bn jewellery industry as banks raise alarm

In his 50 years as a jeweller, Pankaj Parekh has seen a few scams shake the credibility of India’s $60 billion gems and jewellery industry. The latest multibillion-dollar fraud will give banks the impetus to rein in credit for around 300,000 of his counterparts, he says.

Already, Parekh’s business has come under increased scrutiny. One lender last week questioned the validity of a recurring expense charged by a gold supplier for 180 rupees ($2.80) on his books, he said.“To date, not once had my lender asked me about this charge,” Parekh said over the telephone from Kolkata, where his family-run jewellery export business is based. “But now, they are raising queries about everything.”

It’s an unpleasant deja vu moment for India’s jewellers, who are involved in cutting or polishing 12 out of 14 diamonds sold in the world. The $1.8 billion fraud at one of the nation’s biggest banks, allegedly perpetrated by jewellery house owner Nirav Modi, is reminiscent of a diamond company that defaulted five years ago, leading to credit tightening for the industry, India’s second-biggest foreign exchange earner.

Willful Defaulter-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 Plc and Punjab National Bank, about 68 billion rupees ($1 billion), and investigations are ongoing. Last year, investigators arrested the owner of jeweller Shree Ganesh Jewellery House (I) Ltd. for an alleged fraud of 22 billion rupees, involving about two dozen banks.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 jewellery industry in the high-risk category and reduce credit to the segment. According to the latest central bank data, Indian lenders have a combined exposure of about $11 billion to the sector and only 2.9 percent of that amount was deemed a “bad loan”.

“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. The industry mainly made up of businesses with more than two people, found it difficult to get financing five years ago, and will face similar pressures again now, Shah said.

Round Tripping-Over the past two weeks, banks have become very cautious 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 jeweller-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.

Trust-Based Industry “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.

ARTICLE SOURCE- BUSINESS STANDARD.