There is a ray of hope for diamond houses and jewellers which have been hurt by slow demand, tight liquidity, and a trust deficit in the wake of the Nirav Modi scam that shook the trade last year. The Reserve Bank of India (RBI) is understood to have recently assured the industry that jewellers and diamantaires will be offered ‘dollarised credit limits’ from banks.
The move will help these borrowers shield themselves from fluctuations in the dollar-rupee exchange rate.
Industry sources said that since most banks have been reluctant to sanction limits in dollar, jewellers found their credit line shrink as the rupee weakened against the greenback. Suppose, a bank which clears a credit limit of Rs 66 crore when the dollar dollar is trading at 66 against the rupee, has sanctioned a line of $10million; however, if the rupee declines to 70 against the US currency, the limit is not kept unchanged at $10 million — but cut to around $9.43 million. “Since a dip in loan limit reduces import, it also impacts exports of cut and polished diamond and jewellery,” said an industry veteran. The central bank has told the industry that according to a 2013 circular, banks have been allowed to denominate foreign currency component of export credit in foreign currency only. The RBI in a letter to the Gem & Jewellery Export Promotion Council said that it cannot take any action in the absence of specific information on banks which are refusing to provide dollarised limits. Trade representatives have had met senior officials of State Bank of India, the largest lender, to discuss the matter along with a few other issues faced by the business.
The development comes a few months after the global supplier of rough diamonds DeBeers changed its 100-year old policy to give certain flexibility to its buyers, the diamond houses. De-Beers allowed the buyers (or, sightholders in trade parlance) to return around a fifth or more of what they purchased across certain categories at its sight, besides lowering rough prices by around 5%, to support them amid a crunch in India’s diamond polishing industry. In the last one year, diamond houses, grappling with sterner rules from banks since the Nirav Modi defaults, were nudged to change the way they have been doing business. Large banks imposed funding restrictions on borrowers for exports to countries other than the US and Europe, capped exposure at Rs 1,000 crore per borrower, and set stiff credit rating condition for extra financing. The amount of post-shipment credit from banks is less for direct shipment to customers – an issue that the industry has taken up with banks. Borrowers with outstanding of Rs 50 crore or more have to convert partnership firms into corporates by Dec 2019 — a move that could increase their tax liability. Diamond houses that are unable to transform into corporates would have to bring in additional collateral and pay half a percentage point higher interest on loans.
Courtesy - Economic Times