Nirav Modi fraud fallout: Diamond traders fear banks will tighten credit norms
The Rs12,626-crore PNB fraud engineered by diamantaire uncle-nephew duo – Mehul Choksi and Nirav Modi – has upset the goodwill that generations of diamond traders enjoyed with banks.Updated: Mar 06, 2018 12:29 IST
In the past 30 years, since he took charge of the family business, Mahendra Gandhi, 57, a second-generation diamond exporter, said he rarely faced any problem getting credit approval from banks for his business.
The equations, however, seem to have changed.
The Rs12,626-crore Punjab National Bank (PNB) fraud engineered by diamantaire uncle-nephew duo – Mehul Choksi and Nirav Modi – has upset the goodwill that generations of diamond traders, like Gandhi, enjoyed with banks.
“In fact, our rapport with banks forms the backbone of our business,” said Gandhi, president of the Mumbai Diamond Merchant’s Association, the largest body of diamond exporters in Mumbai.
Last week, Gandhi, director Gandhi Enterprises, struggled to get a sanction for meagre credit from the branch of a public sector bank that he has been doing business with for several years. “I have to now wait for an approval from top officials for a small credit, which otherwise would have been cleared at the branch office,” said Gandhi.
Although Gandhi is confident that his request will eventually go through, what worries him is that delays could become a norm with every approval going up to top officials.
It’s not just credit sanctions, but the overall hit their businesses could take as fallout of the fraud, is worrying Mumbai’s diamond trading community, which operates predominantly from Zaveri Bazaar and Bharat Diamond Bourse at Bandra-Kurla Complex (BKC). The traders had been hoping for a better start to this year, after demonetisation and imposition of the Goods and Services Tax (GST) had resulted in a slump last year.
“There is evident panic in the market,” said Gandhi.
Industry experts said the real cause of panic is demand for more collateral by banks in the aftermath of the fraud. “Banks have become sceptical about prospects of credit repayment and started demanding 100 per cent, or even more, collateral. This is new for the diamond industry,” said an expert, who did not wish to be named.
For the close-knit diamond trading community – where verbal commitments are valued more than promissory notes – the new demand for collateral by banks has caused a stir. “The trust deficit [of banks] is the actual cause [for panic],” said an exporter, on the condition of anonymity. “For credits, banks would earlier charge anything between 20% and 40% collateral, depending on the rapport and trust the firm enjoyed with bank officials.”
For sightholders at the Diamond Trading Company (the London-based rough diamond sales and distribution arm of the De Beers family of companies), who have been receiving 10 or more import orders over the years, the collateral was even less — hovering around 10% to 12%, the exporter said.
Another top exporter, who operated from BKC, said the banks extended credits for exports and not on imports. “We don’t get LoU (Letter of Understanding) to avail credits, neither do banks give us loans in any form to make payment for imports [of rough diamonds],” he said, taking a dig at Nirav Modi and Choksi, who obtained credits for their imports through bank-sanctioned LoUs.
Blaming Nirav Modi and Choksi, who he called “rank outsiders”, for bringing a “bad name” to the industry, the trader said diamond exporters get pre- or post-export credits from banks against export bills. In simple terms, when a diamond exporter seeks credit from a bank, he has to either show the export orders (for rough diamond being imported), or the bills of the polished diamonds already exported, pending payment.
Now with trust wiped off, banks are averse to extending credit facility for an extended period, fearful that it might not be repaid. “Even the credit limits of genuine exporters will be curtailed,” he said.
For an industry spread across Mumbai, Surat and Bhavnagar, which churns out 9 out of 10 cut diamonds in the international market – that account for Rs7,50,000-crore worth annual exports – the tightening of credit norms could directly affect the business of more than 6,000 exporters. It is likely to also hit the livelihood of more than 13 lakh persons directly or indirectly connected to the industry.
“The bad name the fraud has brought [to us] will create doubts not only in the minds of our suppliers, but buyers, too, in the coming days,” said an exporter.
Hardik Hundiya, who edits the largest circulated diamond trade periodical Hira Manek, said small- and medium-size traders will be the worst hit. “Banks used to extend credit for an extended period of up to one year at lower interest rates. This helped them as remittances from exports often get delayed by several months,” Hundiya said. “After the scam, banks will set shorter deadlines for credit repayments and that will affect the marginal players.”
Not everyone, however, feels that the entire industry will have to take a hit. “This is going to affect only those who indulge in round-tripping of funds by misusing letters of credits issued to them by different banks,” said an expert.
Meanwhile, deputy managing director of State Bank of India (SBI), Sunil Srivastava, refused to comment on whether the bank would be tightening collateral norms for extending credit to diamond exporters post-PNB fraud.
RETAILERS HAVE VARIED OPINIONS
While diamond exporters predict a slump in business, the retail diamond industry had varied opinions on the effect the fraud would have on their sales. Rajiv Popley, director of Popley Jewellers, said the scam has had little or no impact on his business. “From consumer point of view, the impact of the scam is zero. I don’t think there is anything to worry about for us or anybody,” said Popley.
On the other hand, jewellery manufacturers like Pradeep Shah, whose factory at Zaveri Bazaar supplies diamond jewellery to retail outlets, claimed a 50 per cent dip in sale of branded jewellery. Shah said the scam has created doubts in the minds of customers over the quality of diamonds used in branded jewellery. “Reports of big brands such as Gitanjali and Nirav Modi pushing synthetic diamonds in their retail outlets have caused doubts in the minds of customers about the authenticity of diamonds used in other brands too,” he said.
He, however, said the present fall in sales is more of a “shock reaction” and the market will bounce back. “The market is much bigger than these two entities. Our customers will return once the dust of uncertainty settles.”
Other key market players like Tanishq, promoted by the Tata Group, and Tribhovandas Bhimji Zaveri (TBZ), refused to comment.