White paper prepared with suggestions to mitigate risk perceptions in jewellery sector.
Worried about the potential fallout of the $2-billion fraud at Punjab National Bank involving jewellers Nirav Modi and Mehul Choksi, the commerce ministry-backed Gem and Jewellery Export Promotion Council (GJEPC) has asked banks not to trim credit exposure to the labour-intensive jewellery sector, citing its damaging impact on exports and jobs.
In a white paper, prepared in consultation with bankers after the country’s biggest banking fraud was made public in February, the council has suggested a number of proposals — ranging from risk-based scrutiny of a jeweller’s account while giving loans to evaluation of a jeweller’s stocks at least once a year by independent valuers and adoption of international financial reporting standards by jewellers — to mitigate risk perceptions in the gems and jewellery sector that has often been accused of opaque dealings.
The GJEPC also proposed that working capital limit be assessed in dollar term to help exporters and insulate them against foreign exchange fluctuation.
In the white paper, which will be released formally next week, the GJEPC said: “Downgrading of the (jewellery) trade will further lead to spiking up costs, such as interest, processing fee.” Any such move will make operations unviable, as gems and jewellery is a labour and working capital-intensive sector with low margins. The banks should, instead, look at the performance of each company and its business model while extending loans. “Besides, a credit-risk investigation team should be set up to track and provide information from trade members, which can then be used by the bankers to take an informed credit decision.”
The GJEPC has also proposed a meeting between the council, bankers and trade members once in a quarter for critical data analysis, among others. The council has proposed collateral security based on a company’s credit rating.
After good growth jump up to 2013-14, the pace of gross credit to the gems and jewellery sector slowed. It grew 5.3% to Rs 72,700 crore as of March 30 from a year earlier, worse than an 8.4% rise in non-food credit. As such, gross exports of gems and jewellery in the last fiscal dropped 7.8% to $35.47 billion when the country’s overall merchandise exports jumped almost 10%.
GJEPC will organise a banking summit in Mumbai on May 11. The council’s chairman Pramod Agarwal said, “The banking seminar, to be held this month, gives us a joint forum to regain trust and ensure all bankers have a profitable experience in lending this trade.” GJEPC vice-chairman Colin Shah said the white paper would address and find solutions to specific issues like assessing working capital limits, collateral security, related party transactions and the valuation of stock.
After a drop in 2016, India’s gold demand recovered last year with a 9% rise to 727 tonnes, according to the World Gold Council (WGC). While gold demand dropped 12% in the January-March quarter, the WGC expects consumption to revive from the June quarter. The global body expects India’s gold demand to be on the higher side of the 700-800 tonne range. This means jewellers will be unable to take advantage of a likely recovery in demand if banks squeeze lending to them.
Some established jewellers had recently told FE that while lending to the sector, as such, had been tightened since a flare-up of the rs 6,500-crore default by the Winsome Group in 2015, bankers were suggesting even tighter scrutiny of loan applications after the PNB fraud came to light. Within the sector, small and medium jewellers will be most affected by this scandal, they had said.
Rajiv Popley, executive director at Mumbai-headquartered Popley group, has said a “stray incident should not be generalised” and the entire jewellery industry need not be painted with the same brush.
According to an industry estimate, the annual turnover of the gems and jewellery sector is around Rs 4.5 lakh crore, and it employs 10 million people directly.
Since 70% of the players belong to the unorganised sector, credit flow to them will falter even more.