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India's Credit Crunch
Editorial
Feb 21, 2014 2:42 AM
By Avi Krawitz
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RAPAPORT... Liquidity should be tightening in India’s diamond manufacturing sector despite the spike in activity that has taken hold in 2014. As a result, many view the current buoyant rough market with caution as it reflects a seasonal surge that is expected to slow in April at the start of the new fiscal year in India.
Indian diamond manufacturers note three factors that are affecting their bank credit in 2014: banks are seeing greater risk in the diamond and jewelry market due to a spate of high profile defaults in the past year, banks overseas are reducing their exposure to the industry and the rupee depreciation has resulted in rupee-based bank credit holding less value for their dollar-based rough purchases.
The rupee depreciated by 20 percent against the dollar between May and September 2013 before recovering to its current level. At around INR 62.2/$1, the currency is now 12 percent below the level of a year ago.
While banks keep their financials and fix their credit limits in terms of rupees, export-focused diamantaires get their financing at the spot rate in dollars according to those limits. Therefore, their credit lines are reduced as the rupee depreciates.
For example, if a company fixed a $100 million credit limit on April 1, 2013, it was reflected in the bank’s books as INR 5.4 billion. At the current exchange rate, the INR 5.4 billion limit translates to $87.5 million.
“Even if the banks are not reducing their limits, exporters are working with a forced reduction because of the currency,” a Mumbai-based manufacturer explained, requesting anonymity. He reported that while the Reserve Bank of India (RBI) has recommended banks fix their limits for exporters in dollar terms, there has been no directive to officially change policy.
The result was reflected in an uncharacteristically cautious Indian diamond market in the second half of 2013 that naturally influenced the global trade. This column observed in the past that polished prices began to turn downward around the same time that the rupee slumped in May of last year. As exporters were affected by the rupee depreciation, there was a ripple effect on local dealers who rely on some of the large manufacturers for goods and favorable credit terms.
However, while there has been some adaptation to new rupee levels, diamantaires also note that the banks view the industry with greater risk as large, well-established companies have defaulted on their credit payments and others lost significant value in the financial markets.
In the most public account so far, the Gem and Jewellery Export Promotion Council (GJEPC) informed its members in January that banks have started legal proceedings to recover loans granted to Winsome Diamonds and one of its subsidiaries amounting to about $894 million. Other companies such as Gitanjali Gems and Shree Ganesh lost significant value in the past year and are trading at more than 75 percent below levels from one year ago.
Anup Zaveri, convener of the GJEPC’s banking, insurance and taxation committee, is quick to point out that these cases have been related to gold bullion and not the diamond industry. The council is lobbying the banks by explaining that the diamond business has been relatively strong, especially in the past two months when the market was positive.
One head of a publicly-traded diamond manufacturer said that he uses the same argument to reassure investors who saw the slump in jewelry company share prices last year as a caution toward the whole industry.
Another factor influencing banks in India to exert greater caution toward the industry is the fact that their counterparts overseas are tightening their lending. Israel’s Bank Leumi is closing its diamond branch, while ABN Amro informed its clients that it will finance just 70 percent of rough purchases, leaving clients to cover the remainder.
“The overall idea is that clients reach greater efficiencies in manufacturing,” said Erik Jens, CEO of ABN Amro’s International Diamond & Jewellery Group, which is not directly active in India. “There needs to be better compliance and transparency and everyone needs to work toward that goal and put their own foot in the game,” he said. “We’re also helping clients to develop and enhance a more sustainable and bankable business by being healthier and more robust in terms of financing.”
While the measures taken by ABN Amro went into effect on January 1, Jens noted that the reduced credit lines didn’t influence trading. In fact, he added, the opposite was true as liquidity came back to the market and diamantaires put their own money in when necessary. Rather, Jens cautioned that the rough market is currently too optimistic and will likely cool around April. Lowering the advance lending rate will have its impact in the coming months given the time delay to make these measures effective, he explained.
Diamantaires added that the market is cyclical and will likely remain bullish in the next two months before greater caution sets in. Feedback to Rapaport News suggests that rough trading on the secondary market has been strong this week as dealers expect De Beers will raise prices again at the sight taking place on February 24 to 28.
Simultaneously, manufacturers are uncertain whether polished prices will rise sufficiently by April to enable profits from the rough currently being bought at higher prices.
The international bankers are hoping their measures will resonate in India to exert greater caution and efficiencies in the manufacturing sector. In doing so, Jens believes the industry will be able to create renewed interest from investors and from other banks to enter the industry.
He recognized that India has an advantage over other centers given that multiple banks lend to the diamond industry and given that they operate with finance consortia. Zaveri estimated that about 40 banks currently lend to the industry in India with combined exposure of $5.3 billion as of September 2013. Zaveri added that the industry continues to enjoy government support as a priority lending sector, in which a specific percentage of banks’ funds need to be allocated to such sectors at a discounted rate.
Finance Minister P. Chidambaram did not hint to a change in policy in his interim budget presented this week and local bankers and diamantaires don’t expect any changes in the final draft. Besides, it’s in the government’s best interest to strengthen the local manufacturing sector in the face of competition from other centers.
Still, Zaveri argued that Indian banks are in fact vigilant, contrary to popular perception. He explained that they spread the risk out more than in other centers due to the system of consortia financing, whereby a number of banks are typically involved in lending to one client, with the consortium headed by a lead bank.
Furthermore, Zaveri admitted that there is a sense that the banks are tightening their requirements and that their terms and conditions have shifted in line with international banking standards and the implementation of the Basel accords.
As a result, manufacturers note that the banks are lending to the industry with caution, but are maintaining their financing to larger manufacturers since they work on a case-by-case basis. “While the attitude toward the industry as a whole may have changed, the banks are supporting compliance-driven companies,” said one sightholder.
Such support may result in a shift in the market composition whereby larger manufacturers have access to financing that smaller companies don’t have. It may also explain the aggressive rough buying by large Indian manufacturers since January.
At current levels of polished demand, it’s unclear whether this is sustainable. After all, the diamond market is driven by demand and money supply. If either are lacking, the market will slow. Ultimately, responsible banking should influence a more conservative and healthy trade. While the effects of a credit crunch may not be evident in February, how Indian banks and diamantaires manage their liquidity beyond that will again set the tone for the international diamond market in India’s next fiscal year.
The writer can be contacted at avi@diamonds.net.
Follow Avi on Twitter: @AviKrawitz and on LinkedIn.
This article is an excerpt from a market report that is sent to Rapaport members on a weekly basis. To subscribe, go to www.diamonds.net/weeklyreport/ or contact your local Rapaport office.
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Tags:
ABN Amro, Avi Krawitz, Banks, diamonds, GJEPC, India, Jewelry
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