The Rs 11,300-crore fraud at Punjab National Bank (PNB) involving billionaire jeweller Nirav Modi has stoked fresh concerns about bankers further squeezing lending to the jewellery and bullion sector that has come under heightened scrutiny in recent years following a string of default cases. Jewellers said lending to the sector, as such, has been tightened since the Rs 6,500-crore default by the Winsome Group flared up in 2015, with bankers suggesting even tighter scrutiny of loan applications of such players now. Since the PNB fraud was caused by generating letters of undertakings (LoUs) in favour of Modi through illegal means, jewellery exporters apprehend the issuance of such bank guarantees will now go through rigourous monitoring process, causing avoidable delay. Rajiv Popley, executive director at Mumbai-headquartered Popley group, told FE a “stray incident should not be generalised” and the entire jewellery industry need not be painted with the same brush. Nitin Khandelwal, chairman of the All India Gems and Jewellery Federation, said within the sector, small and medium jewellers will be most affected by this scandal. “As such, small players and MSMEs have always faced greater problems in getting credit from banks. Now, the situation will be even worse for them. Unfortunately, a few large players commit fraud and the entire sector, mostly small players, are constrained to pay the price. Just imagine how many small players would have got loans if the scandal amount of Rs 11,300 crore would have been set aside for them,” he said.
The annual turnover of the gems and jewellery sector is around Rs 4.5 lakh crore, and it employs 10 million people directly, 60% of whom are women, Khandelwal said. Since 70% of the players belong to the unorganised sector, credit flow to them will falter, he added.
The executive director of a public sector bank said: “The gems and jewellery sector will remain a high-risk category for us. It has been going through a roller-coaster ride in the past two-three years, and this fraud just heightens our risk perception of the sector. So we will be careful in lending to them.”
After a drop in 2016, India’s gold demand recovered last year with a 9% rise to 727 tonnes, the World Gold Council said this month. However, domestic demand still trailed a 10-year average of 840 tonnes.
Gross credit to the gems and jewellery sector grew just 0.7% to Rs 69,000 crore as of December 22, 2017, from a year earlier, while total industrial credit rose 2.9% and non-food credit jumped 10%. Ishu Datwani, founder of Anmol Jewellers, said the industry shouldn’t be subjected to suffer because of the alleged misdeed of one person. “While the scrutiny of lending by a bank is bound to be stricter for all jewellers, I don’t think genuine and honest players will suffer much.” Tanya Rastogi, director at Lala Jugal Kishore Jewellers, said this scandal will cast a shadow over the entire industry. “We as an industry condemn the incident and offer our full cooperation to the government to resolve it. That said, none of this would have been possible without the unchecked going-ons of a large institution like the PNB.” Aditya Pethe, director at WHP Jewellers, said: “It’s a very disturbing event and it will surely impact the gems and Jewellery industry.” While the Nirav Modi scandal is by far the worst-reported fraud in the banking sector, there were some notable contributions from the gems and jewellery sector to cases of fraud and defaults. However, the cases of defaults in gems and jewellery are still fewer and less costly than some other sectors.
The Central Bureau of Investigation last year registered six cases of fraud against Winsome Diamonds Group for allegedly cheating three public sector banks of as much as Rs 1,530 crore. The size of the entire fraud and default, however, was much larger, as per reports. Surat-based Vincent Diamonds committed defaults of Rs 4,500 crore in 2013. In 2010, JB Diamond had defaulted on some Rs 800 crore of loans.
The expected squeeze in lending comes at a time when the government had started to look upon gold as an asset class, instead of just a channel to park black money. In 2015, it had announced a monetisation policy to enable housewives to park their gold in banks for an interest and in the latest Budget, it declared the formation of a comprehensive gold policy, which, along with the roll-out of the goods and services tax regime, is aimed at encouraging more jewellers to come into the organised sector.