Theres a shift in the stance of diamond financing banks, who are growing more

cautious by the day. Having recently burned their fingers with two major defaults,
the purse strings are beginning to tighten. The squeeze on credit is already being
felt by the industry. But banks are optimistic about the industrys future and
feel that there is potential for growth. In an exclusive interview with SOLITAIRE,
MAULIK SHAH, the co-founder and CEO of Almus Risk Consulting and a member
of the GJEPCs advisory panel for banking and treasury, outlines the best
practices for maintaining the trust between the industry and banks.
66 solitaire INTERNATIONAL july 2015

shutterstock.com

Re-evaluating Diamond
Financing Risks

Cover story
Tell us a bit about yourself and how long you have
been associated with the diamond industry.
Im a chartered and cost accountant
by qualification. In 2002, I joined Rosy
Blue India, the worlds leading diamond
company. I was chief financial officer of
the company and served for 10 years.
In 2012, I moved out and set up Almus
Risk Consulting along with a co-founder.
Currently, Im the CEO of Almus, and also
an advisor to the GJEPC on banking and
treasury issues.
Can you give us a break-up of the various top
banks exposure to the Indian diamond industry?
The numbers are not publicly available. But
heres a guesstimate.
SBI: I4,000-I5,000 crore
RBS: I4,000 crore
IndusInd: I2,000-I2,500 crore
BOI: I2,000 crore
SCB: I1,500 crore
Other PSU Banks (BOB, Corporation,
P&S, PNB, Dena, Canara, IOB, SBT, UBI):
I500-I1,000 crore each
Other Private Sector Banks (Yes Bank,
HDFC, Kotak): I500-I1,000 crore

Maulik Shah is the co-founder

and CEO of Almus Risk
Consulting, which is in the
business of treasury outsourcing
and currency risk management.
Before setting up Almus, Shah
was the CFO of one of the
leading diamond companies,
Rosy Blue India.
Shah is a chartered and cost
accountant by qualification.
He is on the advisory panel
of the GJEPC for banking and
treasury. He has been a speaker
on banking and forex risk
management in various forums,
namely, Eurofinance, FICCI,
IForex, and CA Study circle.

According to the Reserve Bank of India, banks

had an exposure of J71,500 crore ($11bn) to
the gems and jewellery sector at the end of April
2015. With tightening of lending norms, is this
figure likely to drop and by how much over the
next 1-2 years? What percentage of this could
turn into non-performing assets (NPAs)?
Since my experience is more from the
diamond industry, let me focus on
diamond lending. My estimate on lending
to the diamond industry alone is between
I30,000 crore and I35,000 crore. The
figure is likely to drop due to a slowdown
and aversion of banks to lend to the
industry. Ideally, with the increase in
awareness about risk management by
companies, and a prudent approach by
bankers, NPA should come down over the
next few years.
Are the major defaults in the diamond sector
or jewellery sector? Please elaborate on the
reasons.
This has always been a point of debate
within the gem and jewellery industry.
There are a few major defaults that have
happened in the last 3-4 years. One
positive side of the default is that the
core business has not incurred losses.
The losses are due to forays into non-core
operations. Many of these companies
didnt have professional expertise or a risk
management policy.

What is the average interest rate on diamond

loans?
The Foreign Currency Loans are calculated
as LIBOR + 250bps to 500bps for Pre
Shipment Credit in Foreign Currency
(PCFC) / Post Shipment Credit in Foreign
Currency (PSFC).
Indian Currency Loans are determined at
10.75 to 12.5% for PC / PSC loans.
The gross NPA of public sector banks in the
diamond and jewellery sector has shot up from
5.3% in 2012-13 to 14.1% in 2013-14. Is this
a good time for banks to be in the diamond and
jewellery business?
This sector is high working-capital-intensive
due to high value goods and long working
capital cycles. The sector always relies
upon banks for meeting their financing
requirements. For banks, the sector has
been beneficial with low NPAs, regular
interest earnings, foreign exchange flows
(both imports and exports), treasury
operations, etc.
Globally, the industry is going through a
slowdown; it is part of a long-term cycle. Its
not a great idea to exit during the slowdown.
Even in such a scenario, banks can lend for
need-based requirements of the industry,
keeping proper risk management in place.
There are opportunities for banks to choose
companies from the Micro Small and
Medium Enterprises (MSME) segment,
which incidentally spreads risk for banks.
Major defaulters like Winsome Diamonds and
Forever Precious Jewellery & Diamonds have
cost the banks J6,000 crore. Is there any hope of
recovering this money? How do banks generally
recover bad loans?
I am not competent to comment on the
same. However, from experience, its
observed that banks find it difficult to
recover loans. There are two major assets
that diamond companies hold i.e. stock
and receivables. In addition, diamond
companies offer collateral between 15%
and 100% of the loan amount.
Stocks and receivables are not reliable
during bad times, and banks encounter
legal hurdles when encashing the collateral.
Therefore, there is a serious issue of
recovering bad loans.
Recovery from the primary security (stock
and receivables) can be improved by banks
exercising proper checks on the movement
of goods and KYC (Know Your Customer

solitaire INTERNATIONAL july 2015 67

and also Know Your Customers Customer).

Banks can even send teams for inspections
and audits at regular intervals.
Collateral recovery is an issue across
the banking industry. The RBI and the
government are working on the same.
In general, how will the tightening of loans impact
the Indian and global diamond industry?
As stated earlier, diamond industry is high
working-capital-intensive and relies on
availability of finance to manage the cycle.
Tightening of loans will have an impact both
on the Indian and global diamond industry.
There is also a positive side to the
loan restriction. In the industry, mining
companies have a cash model (i.e. advance
payment against sale of rough diamonds).
On the other extreme, retailers also operate
on a cash model (from end consumers).
The manufacturer, intermediaries,
distributors end up investing into a pipeline
stock. Tightening of loans may help improve
the entire pipeline efficiency.

In fact, today the biggest

issue for the industry
is that bank finance is
centralised with medium
to big sized players. Even
banks prefer dealing
with a few large accounts
with high exposure. Its a
crowded place.

Over the years in this industry, have you seen the

midstream changing its ways to bring in more
transparency?
Yes. There are both external and
internal factors that have contributed to
improved transparency and governance
in the industry. External factors include
introduction of various acts, regulations
like the Prevention of Money Laundering
Act and the Kimberley Process. Internal
factors include audits conducted by mining
companies, Best Practice Principles, RJC,
governance conditions laid down by mining
companies like unqualified audit reports.
In addition, diamond companies have
realised the importance of implementing
systems and processes to be more
competitive and several initiatives are being
taken up by these companies, which has
brought in transparency and governance.
Could you elaborate on the best practices
followed by the top players that can be emulated
by the industry?
Creating an organisation structure with
roles and responsibility at various levels
Induction of professionals in various
positions
Complete trail of goods flow from
rough procurement, assortment,
manufacturing, polished assortment,
final despatch to the end consumer
Implementation of Enterprise Resource
Planning (ERP)

68 solitaire INTERNATIONAL july 2015

Managing interest rate risk, exchange

rate risk, credit risk, liquidity risk and
prudent management of stocks
Disclosure of information in various
submissions
How are the diamond industry loans structured
through the banking consortia in India?
The arrangement of working capital loans
extended by banks is either in the form of
multiple banking or consortium banking.
Generally, smaller bank limits are with
multiple banks and with the increase in the
limit and scale of operations companies
prefer the consortium route. This is highly
company specific.
Will tightening of banking regulations and the
increasing lending costs squeeze out SMEs from
the Indian diamond industry? Does that make
consolidation in the midstream inevitable?
I am not sure whether tightening banking
regulations and increased cost will squeeze
out SMEs. In fact, today the biggest issue
for the industry is that bank finance is
centralised with medium to big sized
players. Even banks prefer dealing with a
few large accounts with high exposure. Its a
crowded place. There are real opportunities
even for banks to spread out both for
risk management and its lucrative. The
SMEs of today are big players of tomorrow.
Partnering with them at an early stage can
be an excellent opportunity for banks.
Coming back to the question of impact on
SMEs, they have limited access to bank
finance. Market credits incur high costs. So,
I dont think it may have a significant impact.
At the same time, consolidation is inevitable
because of the prolonged slowdown and
severe competition. Its going to be survival
of the fittest. The companies that invest
in bringing efficiencies into the supply
chain and finance, and look to lowering the
turnaround time will survive.
What specific measures can banks take to
reduce risk?
Invest in risk management
Study in detail monthly data submitted by
companies (it can give early warnings)
Continuity of key banking officials who
acquire diamond banking knowledge
Being vigilant about the entire
movement of goods
Be present in overseas market and
access information that pertains to credit
risk or any other risk to the industry
Be aware about companys focus in
core and non-core areas; whether the

Cover story
company is taking excessive leverage
and diversifying in other areas
Regular sharing of information, dispute
cases with the GJEPC

Apart from this, there are new opportunities

for the Indian banking industry. India has
its own uniqueness as a market the only
country that has a strong manufacturing
and consumer base. The government of
India has included gems and jewellery
in Make in India (and now Make for
India!!!). The government has announced
a few measures like the Special Economic
Zones (SEZ) to make India a global hub
for the industry. A lot is still to be done on
that front in the areas of taxation, legal
structure, business-friendly measures,
and labour laws. But, with all that in place,
yes, we are looking at the Indian diamond
industry to play a key role in the global
diamond industry. This provides opportunity
for banks operating in India.
How can the upstream (read miners)
and downstream (read retailers) support
manufacturers to reduce their financial burden?
This connects with my earlier submission
on who funds the entire pipeline.
Traditionally, a miner being a monopoly
player with control over supply, demands
advance money and on the other extreme,
a retailer with control over market is always
demanding. Manufacturers are squeezed
from both the ends. Its time for every entity
in the entire pipeline to be responsible for
another player in the chain. Every single
player in the pipeline has a role to play.
One exists because of the other. It requires
a paradigm shift in the way one player
relates to the other. Its not either or but
its you and me One has to realise that
Only when I make my fellow partner (read
manufacturer) strong, will I survive.

shutterstock.com

From a banking perspective, how do you see the

Indian industry evolving over the next 5-10 years?
At present, the Indian diamond banking
space includes all Public Sector Banks,
Private Sector Banks and Foreign Banks.
This is unlike overseas markets where
only a few selected banks have exposure
to the diamond industry. Moving forward,
we may see consolidation even in Indian
diamond banking. The sector requires
specialised expertise and experience.
Banks that have a focussed approach,
complete visibility across the pipeline, and
a prudent risk management structure, will
find it rewarding to continue to operate in
this sector.

Sharing of information by banks at initial stages

of dispute can definitely go a long way apart from
regular interaction between all interested parties.
The GJEPC has proposed the formation of a working
group structure that consists of council members
and key bankers to improve the interaction.
Do banks engage with industry bodies like the
GJEPC on a regular basis when it comes to risk
management?
The practice was not so prevalent in the
past but of late, the engagement has
increased. Now they are open. The GJEPC
on its part has taken a number of initiatives
like organising Annual Banking Summit,
World Diamond Conference, Project MY
KYCBank, interaction with key bankers with
the industry ...
This relationship needs to be further
strengthened for better risk management.
Sharing of information by banks at initial
stages of dispute can definitely go a long
way apart from regular interaction between
all interested parties. The GJEPC has

proposed the formation of a working group

structure that consists of council members
and key bankers to improve the interaction.
Anything else you would like to add.
The Almus team has unique and rich
experience of over two decades of the
diamond industry, banking and managing
forex risk. Its been our endeavour to
closely work with members and the
Council in the areas of banking and
risk management. We had conducted a
presentation in association with Diamond
Exporters Association Limited (DEAL) and
the Bharat Diamond Bourse in the past
and will continue to take such initiatives by
organising educative seminars for all the
members. n

solitaire INTERNATIONAL july 2015 69