Diamond companies, banks in a tussle as rupee dips

Amid the rupee touching new lows, a tussle has broken out between high-street banks and Indian diamond houses.

The diamantaires, which moved the Reserve Bank of India (RBI) this week, are pushing banks to follow a 2013 regulatory directive that aims to partly insulate exporters from fluctuations in the currency.

Banks fix the overall export credit in rupees. However, with a depreciating currency eating into the quantum of loans sanctioned by local banks, diamond firms are left with less and less money for import of rough stones which are cut in India. More than 90% of the world’s diamonds are cut and polished in India before the polished ones are shipped to world’s leading markets like the US and China.

The mistrust between banks and jewellers, choppy exchange rates, fears of a looming recession in the world’s large luxury markets and the opaque, little-understood nature of the trade are holding back banks from raising loan limits in line with a sliding rupee.

“We can raise the (loan) limits only against additional collaterals…There is so much uncertainty. Diamond industry, you must understand, has a fairly long working capital cycle. Most banks are unsure how to accurately value the stones. The dealings are often with their relatives in Dubai, Antwerp and London,” said a senior official in the banking industry. “Most banks would be hesitant in implementing RBI’s 2013 circular blindly,” said another banker.

Diamond industry circles say the industry, which is a large export earner, is traditionally organised differently than other businesses. Bankers’ bitter experience with a handful of fraudsters should not come in the way of application of credit rules approved by the central bank.

According to a September 25, 2013 RBI communique, banks may compute the overall export credit limits of the borrowers on an on-going basis, based on current assets, current liabilities, and exchange rates, and reallocate limits in foreign currency as per a bank’s policy. Thus the rupee equivalent of the foreign currency component of the export credit may rise (when the rupee weakens against the dollar) and fall (when the local strengthens). (The total export credit has a rupee and forex component. The RBI directive enabled banks to change the forex part along with the movement in exchange rate). Alternatively, RBI had said that banks may “denominate the foreign currency component of export credit in foreign currency only with a view to ensuring that exporters are insulated from rupee fluctuations.”

“There is, however, no compulsion on banks to do this. As a result banks are demanding extra collateral which most diamond firms are either unwilling or not in a position to give. They have a point and some of them had a few years ago given additional collateral,” said another banker. After the Winsome and Nirav Modi fiascos – though their dealings resulting in huge losses for banks were in gold and pearls respectively – banks had for some time turned cautious on credit to diamond companies, many of whom were told to cough up more collateral for same loan limits.

Indians gems and jewellery exports were $39.31 billion in 2021-22, up 10.4% from the pre-Covid number of $35.6 billion in 2019-20. Of this, cut and polished diamonds contributed $24.2 billion in 2021-22. “With the government setting an export target of over $45 billion for 2022-23, banks should give some elbow room to diamond companies,” said a jeweller. But with bankers digging in their heels, it’s unclear how the story would play out in the run up to the festive season and Christmas when the demand for precious stones surges.

Source: Economic Times

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