Alleged Indian diamond debt fraud has international Implications

Tighter Indian bank credit will dent diamond prices and sales

The Indian diamond industry is huge. In terms of the volume of carats bought and sold, India by far, is the world’s biggest market. The alleged $1.77 billion debt fraud  will thus affect diamond mines, dealers, cutters & jewellers.

We are worried about the ripple effects,” a spokesperson of the Antwerp World Diamond Centre (AWDC), said.

Indian credit noose will tighten

The Reserve Bank of India (RBI) is raising the regulatory bar. A new committee will monitor large, dodgy loans. Members are concerned that loan collateral comprises suspect, overvalued assets. The RBI will use IT techniques to catch fraudsters. It will demand much higher internal auditing standards from banks.

The more intensive oversight will force bankers to scrutinise their loan books. The days of easy credit for Indian diamond dealers and manufacturers are thus over. Other Indian businesses will also find it difficult to obtain loans.

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Last October, Eli Avidor, CEO, Israel Diamond Exchange estimated that Indian diamond debt was at least $10 billion.  The Punjab National Bank alleged $1.77 billion fraud aggravates the problem. For a start the potential losses have had a knock on $1.4 billion impact on five other banks.  The overall Indian diamond debt could thus be as high as $12 billion. The alleged scam implies that a third of those loans might not be repaid. The question is the extent of dud debt.

That is not the only problem. Potential loan losses of Indian banks and foreign banks in India, are estimated at $147 billion.

The impact is likely to be two-fold.

First, Indians will buy less diamonds from miners

Banks that previously provided large credit lines, will now sift through loans and their collateral. The inevitable result will be tighter credit for Indian diamond dealers, manufacturers and jewellers.

Antwerp and Israeli dealers previously complained that Indian counterparts were at an advantage. Using extensive credit lines, Indian dealers outbid their global competitors. They bought large quantities of diamonds from De Beers, Alrosa, Canadians, Australians and others. The game is now likely to change.  Indian dealers with less credit will buy fewer gems.

“In the coming year diamond miners may well have to sell fewer gems and be forced to cut prices,” an Antwerp dealer said. “Paradoxically, normalised Indian credit will benefit  global dealers and manufacturers. Rough diamond prices should stabilise at more reasonable levels. There will be less financial pressure on the cutters who buy the rough gems and polish them. Their profit margins should rise.”

“The scandal and its implications are an Indian banking problem,” the dealer added. “Antwerp and Israeli dealers and cutters have been subject to stringent controls, regulations and credit for several years.”

(The main diamond market, in terms of value is Antwerp. Israel is also significant. Over the years, the Indian diamond industry has expanded rapidly. It polishes the largest number of carats as labour costs are much lower than global competitors. Indian diamond cutters can thus cut and polish small and semi industrial stones cheaply. The Indian diamond industry became reckless after the global crash of 2008. The government has a lot to answer for. Fearful of growing unemployment in the diamond industry, the government persuaded state banks to boost credit.)

The second problem is that other Indian businesses will come under pressure

The big question is what will happen to other Indian businesses that have survived on lax credit. Conditions could well become more difficult. As bankers examine suspect loans, hopeful businesses will struggle to obtain finance. The gold and jewellery industry, already struggling under the burden of higher taxes, could well import less precious metals. This would have a negative impact on global bullion and platinum markets and potentially prices. Steel and other industries could come under pressure. Foreign banks doing business with India could also incur losses.

Note: Indian billionaire jeweller Nirav Modi has denied allegations that he was involved in the alleged $1.77 billion PNB loan fraud. Indian federal police have alleged that Mr Modi and others conspired with employees of the second-largest state bank. They alleged that Mr Modi fraudulently obtained advances to pay overseas suppliers. In a letter Mr Modi claimed that PNB refused a request to sell his Firestar Group, then worth $1billion. He added that the seizure of businesses and resultant “media frenzy” caused Firestone to stop trading. PNB thus “jeopardized” Mr Modi’s ability to repay debts, the businessman claimed.

This article was first published in The Business Times Singapore

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