TRUST DEFICIT IN JEMS AND JEWELLERY SECTOR



Saddled with bad assets like the Rs 6,000 crore Winsome Diamonds account, lenders have come out strongly against shady practices in the gems and jewellery sector, stating that there exists a "trust deficit" that makes doing business with the industry difficult. "As of today, there is a huge trust deficit within the industry, bankers, regulators and government. This is one segment where trust is most important," Bank of Baroda's Chairman and Managing Director S S Mundra said, speaking at a gathering of the gems and jewellery industry over the weekend. His reservations included the likely diversion of funds by the players into real estate, equities and commodity market investments; an "intermingling" between gold, diamond and jewellery verticals which led to interest arbitrage and "confusion" in working capital positions; and even a lack of trust in the trade data put out which makes it difficult to compute the net exchange earning. Mundra, who is widely tipped to be the next Deputy Governor of the Reserve Bank of India, hinted that such practices make it very uncomfortable for a bank to do business with the sector, even though the sector may deliver benefits on employment generation and foreign exchange earning front. State Bank of India's Chairman Arundhati Bhattacharya targeted the lack of transparency in the sector and said it is due to this that regulations governing lending to the sector are very stringent and hence, bankers are retreating from this business globally. "At this point of time, there is very little transparency as to which part of business is utilising what funds and what value and what margins are there in individual parts of the business," she said, affirming SBI's commitment to the sector, where it has a Rs 4,000 crore exposure.
"Those who are in the entire value chain need to understand that there has to be much greater clarity in how the value gets captured and therefore, give much better understanding to the bankers as to what financing is required and how it needs to be done," Bhattacharya advised. Mundra said problems for the sector started in the aftermath of the 2008 global financial meltdown, which led to a massive correction in demand. The ambitious expansion by the players before and after the crisis was also a major pain point, he said. Bhattacharya said branching out further into the value chain like retailing, beyond the traditional cutting and polishing of rough diamonds by the Indian companies also hurt the players hard. The Rs 6,000 crore default by Winsome Diamonds are representative of the trend in the sector. Some of the 15 lenders in the consortium are mulling to declare the account as a "wilful defaulter". With a Rs 1,800—crore exposure, Punjab National Bank is the leader of the 15—member consortium of lenders, who are mostly state—run banks. The others include Bank of India, Union Bank of India, Canara Bank, Vijaya Bank and IDBI Bank among others.

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