Diamondwhich transferred to the Reserve Bank of India (reserve Bank of India) this week, prompting banks to comply with a 2013 regulatory directive, which aims to partially protect exporters from currency fluctuations.
Banks fix the total export credit in Rs. However, a. with depreciating currency Eating the amount of loans sanctioned by local banks, diamond firms are left with less and less money to import raw cut stones into India. More than 90% of the world’s diamonds are cut and polished in India, before the polished diamonds are shipped to major world markets such as the US and China.
Mistrust between banks and jewellers, volatile exchange rates, fears of an imminent recession in the world’s major luxury markets and the opaque, poorly understood nature of business are preventing banks from raising credit limits in line with the depreciating rupee.
“We can only raise the (loan) limit against additional collateral… There is a lot of uncertainty. The diamond industry, you must understand, has a fairly long working capital cycle. Most banks are unsure how to properly appraise stones. Len -Dan often lives with his relatives in Dubai, Antwerp and London,” said a senior executive in the banking industry. Another banker said, “Most banks will be hesitant to blindly implement the 2013 RBI circular.”
Diamond industry chambers say the industry, which is a major export earner, is traditionally organized differently than other businesses. Bankers’ bitter experience with a handful of fraudsters should not come in the way of implementing credit rules approved by the central bank.
According to an RBI release dated September 25, 2013, banks may calculate the overall export credit limit of borrowers based on current assets, current liabilities and exchange rates, and re-allocate limits in foreign currency as per the bank. Policy. Thus, equivalent to the foreign currency component of export credit, the rupee may rise (when the rupee weakens against the dollar) and fall (when the local is strong). (Total export credit has a rupee plus a foreign currency component. The RBI directive enabled banks to replace the foreign currency portion with exchange rate fluctuations). Alternatively, the RBI had said that banks “may determine the foreign currency component of export credit in foreign currency only with a view to ensuring that exporters are protected from rupee fluctuations.”
“However, there is no compulsion on banks to do so. As a result banks are seeking additional collateral, which most diamond firms are either not ready to give or are not in a position to give. They have a point. And some of them had some years ago given additional collateral,” said another banker. After Lovely And the failure of Nirav Modi – although his transactions resulted in huge losses for banks, in gold and pearls respectively – had banks for some time being careful in lending to diamond companies, many of whom were required to have similar credit limits. Was asked to cough up more collateral.
Indian gems and jewelery exports stood at $39.31 billion in 2021-22, up 10.4 per cent 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 set an export target of over $45 billion for 2022-23, banks should give some scope to diamond companies,” said a jeweler. But with bankers tightening their backs, it is unclear how the story will play out if the demand for precious stones picks up by the festive season and Christmas.