Banks might tighten loans to jewellery sector

Owing to Winsome group default, lenders could seek higher collateral and margins

With the Winsome group (erstwhile Su-Raj Diamonds) defaulting on its loan, gems and jewellery companies might face hurdles in securing loans, as banks might now seek more collateral, as well as higher margins.

Senior bankers said the loan-to-value ratio might be made more stringent. For instance, if loan credit was given up to 60 per cent of the value of collateral earlier, now it would be for only 50 per cent.

A Gems and Jewellery Export Promotion Council official said banks had become more careful in issuing fresh standby letters of credit. After a sharp rise in defaults during the global financial crisis of 2008-09, banks had taken a cautious approach to financing units in the sector. Bank loans to the sector grew from Rs 27,477 crore in March 2008 to Rs 67,024 crore at the end of March 2013. Gross non-performing assets rose from Rs 270 crore in March 2008 to Rs 2,750 crore.

Winsome had delayed servicing its maturing letter of credit obligations by about a month, owing to the company’s weakening liquidity position due to a sudden stretch in receivables. Rating agency CRISIL had downgraded the company and some group entities to ‘D’, following the default in repayments. The company is already in talks with lenders to restructure its loans.

Compared to jewellery exporters, diamond exporters could face a bigger hurdle. As they export loose diamonds to traders abroad, these traders remain unidentified. But jewellery exports are mostly sold to retailers, which makes it easier to assure banks.

“We may take a 20 per cent higher margin against the collateral in the case of loans for jewellery exports. Banks have also become very cautious while giving out loans to diamond traders,” said a senior State Bank of India official.

Bankers and jewellery exporters expect the Reserve Bank of India (RBI) to increase the margins on gold holding, as well the amount of collateral against which the loan is taken. Rajiv Popley, director of jewellery retailer and exporter Popley Group, said banks would highlight gems and jewellery traders and seek more collateral. Earlier, too, banks were wary of lending to diamond traders; now, with RBI considering tightening the norms, it would become very difficult for these traders to avail of loans.

Currently, diamond sales are stagnant, owing to the economic instability in the US and Europe, major diamond-importing regions.
Source : http://www.business-standard.com; Sharleen D' Souza & Abhijit Lele