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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